## 1rwaea2021001 — 5.7 percent next year. ## Source details **Canonical URL:** [1rwaea2021001 — 5.7 percent next year.](https://www.imf.org/-/media/files/publications/cr/2021/english/1rwaea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1rwaea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1rwaea2021001.pdf.json) --- ### Recent developments - Real GDP contracted by 4.4 percent year-on-year in the first half of 2020. - Real GDP is expected to be -0.2 percent in 2020 and is projected to rebound to 5.7 in 2021, albeit below potential. - Authorities adopted early stringent containment measures and implemented a large policy package to address the COVID-19 pandemic fallout. - As of November 19, Rwanda has recorded 5,543 cases of infection and 46 deaths, with the number of daily cases moderating. - Reopening measures: easing domestic movement restrictions and reopening schools; gradual acceleration of economic reopening. - Social impact: available estimates suggest that up to 1 million people could fall into poverty. ### Fiscal impact, policy guidance, and program objectives - Fiscal outcomes and outlook: - Fiscal deficit is expected at 8.5 percent of GDP in FY2020/21. - Public debt projected at 67 percent of GDP at end-2020. - Program recommendation: In the absence of large economic surprises, the fiscal deficit in FY20/21 should be contained to about 8.5 percent of GDP. - Under the baseline, debt will remain sustainable with a moderate risk of debt distress. - Policy guidance from IMF staff and Acting Chair: - Contain fiscal risks and plan contingency measures given the highly uncertain outlook. - To preserve fiscal space, reprioritize spending and seek additional concessional financing should the outlook deteriorate further. - Closely monitor fiscal risks from state-owned enterprises and state-guaranteed loans. - Adopt a credible and growth-friendly fiscal consolidation strategy after the crisis abates centered on re-igniting domestic revenue mobilization, streamlining non-priority spending, and re-prioritizing public investment. - Consider announcing and legislating consolidation measures before the end of the program to support credibility. - Priority structural reforms in the near term: strengthen fiscal risk management (including of SOEs) and monitor financial sector risks. ### Monetary and financial sector response - Monetary stance and measures: - Monetary policy has been accommodative; temporary extraordinary measures provided liquidity to the banking sector. - MPC kept the policy rate unchanged at 4.5 percent following its November meeting. - Recommendation: central bank should keep monetary policy data driven and continue to closely monitor credit and liquidity risks, including from loan restructuring, to safeguard financial stability. - Financial sector indicators and resilience: - Banks’ NPLs ratio stood at 5.2 percent at end-September (source variation shows 5.5 percent in June and 5.2–6.8 across reporting dates). - Banks restructured 45 percent of their loan portfolio; MFIs restructured 21.9 percent of loans. - MFI NPLs rose to 12.8 percent at end-June and declined to 9.2 percent at end-September. - Banking sector CAR: 23.7 percent at end-June 2020; Core capital ratio: 22.3 percent at end-June 2020. - Aggregate Liquidity Coverage Ratio: 253 percent at end-June 2020. - BNR actions: reserve requirement cut from 5 percent to 4 percent (injected RWF 23.4 billion on April 1, 2020); ELFB worth RWF 50 billion established. ### Social and human capital impacts - Household consumption and employment: - Household consumption expected to drop by double-digits and remain depressed for the next decade. - Poorest 20 percent of rural households expected to suffer the most (14.2 percent drop in consumption through 2030). - Employment could be 8.4 percent lower in 2020, with large losses in all major sectors. - Health and education disruptions: - Disruptions in essential health services, immunization, and child services during March–May 2020 with persistent effects on institutional deliveries; many services recovered in subsequent months. - Vaccination programs (Polio3, Penta3, BCG) recorded less participation than in 2019; treatment for malaria, diarrhea, and pneumonia in under-five children fell below 2019 levels. - Education: an estimated 3.5 million children remained out of school for most of 2020; participation in remote learning fell over time; 63 percent of teachers expect higher dropout rates. - Research reference: students affected by closures might expect approximately 3 percent lower incomes over their lifetimes. ### Economic Recovery Plan (ERP) and Economic Recovery Fund (ERF) - ERP COVID-19-related spending: - ERP included about US$ 311 million (3.3 percent of GDP) in COVID-19-related spending spanning FY 19/20 (1.8 percent of GDP) and FY 20/21 (1.5 percent of GDP). - FY20/21 COVID-19-related spending needs amount to 2.9 percent of GDP (including carry-over and US$50 million additional ERF endowment). - ERF design and uptake: - ERF composition: hotels debt restructuring window US$50 million; working capital financing windows US$47 million; guarantee scheme US$3 million for up to 75 percent of ERF loans to SMEs. - As of end-October 2020, 51 percent of ERF funds allocated to support businesses had been disbursed. - Uptake of the working capital window was only 10 percent of the original allocated amount (RWF 50 billion). - SACCOs window outstanding applications totaled 250 percent of the window’s capital after easing eligibility. - Implementation challenges: initial logistical issues and overly stringent eligibility criteria (minimum sales reductions, tax compliance) limited uptake; banks’ limited risk appetite and compressed interest margins under the ERF (6 to 8 percent vs above 11 percent outside ERF). ### Key projections and selected indicators (highlights) - Real GDP: 8.5 (2019); -0.2 (2020); 5.7 (2021); 8.0 (2022); 6.8 (2023); 8.0 (2024); 7.5 (2025). - CPI (period average): 2.3 (2019); 8.0 (2020); 5.0 (2021); 5.0 (2022); 5.0 (2023); 5.0 (2024); 5.0 (2025). - Total revenue and grants (percent of GDP): 23.6 (2019); 23.1 (2020); 23.4 (2021); 23.8 (2022); 23.9 (2023); 23.3 (2024). - Expenditure (percent of GDP): 31.9 (2019); 32.9 (2020); 31.3 (2021); 30.2 (2022); 29.6 (2023); 28.3 (2024); 27.0 (2025). - Overall balance (percent of GDP): -8.2 (2019); -9.7 (2020); -7.9 (2021); -7.0 (2022); -5.8 (2023); -4.4 (2024); -3.7 (2025). - Total public debt incl. guarantees (percent of GDP): 59.0 (2019); 65.9 (2020); 71.1 (2021); 73.7 (2022); 73.3 (2023); 72.0 (2024); 70.0 (2025). - PV of total public debt incl. guarantees (percent of GDP): 44.5 (2019); 45.5 (2020); 48.8 (2021); 50.6 (2022); 50.9 (2023); 50.4 (2024); 49.3 (2025). - Current account balance (incl grants, percent of GDP): -10.6 (2019); -12.2 (2020); -12.5 (2021); -11.4 (2022); -9.6 (2023); -8.4 (2024); -8.0 (2025). - Gross international reserves (US$ millions): 1,367 (2019); 1,643 (2020); 1,463 (2021); 1,556 (2022); 1,654 (2023); 1,834 (2024); 1,834 (2025). - Reserves in months of next year's imports: 4.4 (2019); 5.5 (2020); 4.3 (2021); 4.2 (2022); 4.1 (2023); 4.2 (2024); 4.2 (2025). ### Program status, conditionality, and Board actions - The Executive Board concluded the third review of Rwanda’s program supported by the IMF’s Policy Coordination Instrument (PCI) on December 16, 2020. - The PCI program was approved on June 28, 2019 and expires in June 2022. - Staff recommends completion of the third review under the PCI. - Program monitoring: semi-annual QTs, continuous targets, RTs, and a monetary policy consultation clause; several missed and reset RTs noted (e.g., mobile phone government securities issuance platform reset to end-June 2021). ### Debt sustainability, risks, and calibration of fiscal anchors - Debt sustainability assessment: - Updated DSA indicates a moderate risk of debt distress. - Staff estimates suggest a nominal debt anchor of 65 percent of GDP would be appropriate; this anchor remains consistent with the EAMU’s PV of debt ceiling of 50 percent, corresponding to a PV of debt of around 45 percent given concessionality. - Key debt-related risks and mitigation: - Rolling over the 10-year Eurobond issued in 2013 leads to a one-off breach of the debt service-to-revenue ratio under the baseline scenario in 2023. - Higher gross financing needs compared to the 2019 DSA pose a medium-term liquidity risk. - Mitigating measures explored: pre-financing of debt and buyback of debt falling due. - Recalibrated consolidation path (selected figures): - Proposed overall deficit (percent of GDP): 2021: -7.9; 2022: -7.0; 2023: -5.8; 2024: -4.4; 2025: -3.7; debt-to-GDP trajectory: 2021: 71.1; 2022: 73.7; 2023: 73.3; 2024: 72.0; 2025: 70.0; 2028: 64.4; 2029: 64.0. ### Adverse scenario and downside risks - Adverse (protracted pandemic) scenario assumptions: - A new lockdown lasting another 6 weeks on top of the previous 6-week one in Q2 2020 (cumulative stringent measures of 3 months in 2020). - Real GDP under the adverse scenario: -2.6 percent y/y in 2020 (vs -0.2 baseline). - Adverse scenario impacts (selected): - Real GDP: 2021 Adverse: 3.4 (vs 5.7 baseline). - Gross public debt (percent of GDP): 2021 Adverse: 75.9 (vs 70.9 baseline); 2022 Adverse: 81.0. - Net international reserves (months): 2021 Adverse: 2.7 (vs 4.3 baseline); persistent low reserve coverage through 2024 in the adverse path (e.g., 2.2, 2.0, 2.3). - Fiscal balance (percent of GDP): 2021 Adverse: -9.2 (vs -7.9 baseline); 2022 Adverse: -8.5. - Under adverse scenario, public debt-to-GDP rises above 75 percent in 2021 and convergence to EAC anchor delayed by several years (PV-of-public-debt reaching EAC 50 percent only by 2030 under adverse). - Policy response under adverse scenario: - Monetary and financial sector policies would continue to accommodate the shock; central bank might increase liquidity support measures and consider further accommodative policy consistent with framework. - To preserve debt sustainability, growth-friendly fiscal consolidation would need to be deeper and longer than under the baseline. ### Structural reforms, revenue strategy, and governance priorities - Medium-Term Revenue Strategy (MTRS): - Authorities expect to finalize diagnostic studies by end-year and launch a three-year MTRS by end-June 2021. - Original goal of increasing revenue-to-GDP by 1 percentage point each year over 4 years is not feasible owing to the pandemic; projected increase under baseline is less than one ppt in absence of new tax measures. - Fiscal risk management and transparency: - Fiscal Risk Committee (FRC) set up; comprehensive fiscal risk statement published. - With Fund TA, bi-annual health-check assessments of fiscal risks from SOEs to be submitted with remedial measures to the FRC by end-May 2021 (RT). - Expand GFSM 2014 fiscal reporting coverage and compile NFPS financial balance sheet; quarterly BER coverage to be expanded. - Create a dedicated COVID-19 response financing item under the chart of accounts and a separate bank account under TSA for ERP contributions; all pandemic-related expenditures to be audited and published by May 2021. - Financial sector legal and supervisory enhancements: - BNR issued regulations and directives on mortgage refinancing companies, AML/CFT sanctions, insurer changes, ELFB, and ERF; planned regulations on consolidated insurance supervision, proportionality for banks, financial holding companies, and e-money issuer rules. - Three-year IMF TA program planned to address FSSR findings, strengthen stress-testing, supervisory capacity, and financial market infrastructure. ### Staff appraisal and policy recommendations (selected) - Staff assessment: - Pandemic interrupted strong economic performance; growth in 2020 expected to be -0.2 percent, down from 9.4 percent in 2019; outlook highly uncertain with downside risks predominating. - Authorities responded promptly with well-designed measures to support households, preserve jobs, boost healthcare spending, and provide liquidity and borrower relief. - Recommended policy priorities: - Contain fiscal and financial sector risks; closely monitor fiscal risks from SOEs and state-guaranteed loans; monitor credit and liquidity risks. - Adopt contingency planning: reprioritize spending, seek additional concessional financing, delay non-priority spending while protecting priority spending. - Maintain transparency and accountability of COVID-19-related spending; continue ex-post audits and publication of expenditures; consider publishing beneficial ownership information for government procurement awards. - Adopt a credible, growth-friendly fiscal consolidation once the crisis abates; absent large economic surprises, contain FY20/21 deficit to about 8.5 percent of GDP. - Continue structural reforms to strengthen fiscal transparency, tax compliance, and the interest rate-based monetary framework. *Source: Executive Board conclusion and staff report for Rwanda — Third Review under the Policy Coordination Instrument (December 16, 2020); IMF staff report (chapter content provided); Rwandan authorities and IMF staff estimates and projections.* ### 5.7 percent next year. ### 1rwaea2021001 - 5.7 percent next year. ### Recent developments - Real GDP contracted by 4.4 percent year-on-year in the first half of 2020. - Real GDP is expected to be -0.2 percent in 2020 and is projected to rebound to 5.7 in 2021, albeit below potential. - The authorities adopted early stringent containment measures and implemented a large policy package to address the fallout from the COVID-19 pandemic. - As of November 19, Rwanda has recorded 5,543 cases of infection and 46 deaths, with the number of daily cases moderating. - Reopening measures: easing domestic movement restrictions and reopening schools; gradual acceleration of economic reopening. - Social impact: available estimates suggest that up to 1 million people could fall into poverty. ### Fiscal impact and policy - The associated spending needs coupled with revenue underperformance have caused deviations from earlier fiscal program targets. - Fiscal deficit is expected at 8.5 percent of GDP in FY2020/21. - Public debt projected at 67 percent of GDP at end-2020. - Program objective: strike a balance between sustaining the economic recovery and maintaining fiscal responsibility through the remainder of the PCI (expires in June 2022). - Policy guidance from IMF staff and Acting Chair: - Containing fiscal risks and planning contingency measures remains critical given the highly uncertain economic outlook. - To preserve fiscal space, authorities should reprioritize spending and seek additional concessional financing should the outlook deteriorate further. - Fiscal risks from state-owned enterprises and state-guaranteed loans should be closely monitored. - Adopting a credible and growth-friendly fiscal consolidation strategy after the crisis abates will be critical to preserve debt sustainability while supporting the nascent recovery. - The strategy should be centered on measures to re-ignite domestic revenue mobilization, streamline non-priority spending, and re-prioritize public investment. - Such measures could be announced and legislated before the end of the program to support their credibility. - Program recommendation: In the absence of large economic surprises, the fiscal deficit in FY20/21 should be contained to about 8.5 percent of GDP. - Under the baseline, debt will remain sustainable with a moderate risk of debt distress. - Priority structural reforms in the near term: strengthen fiscal risk management (including of SOEs) and monitor financial sector risks. ### Monetary and financial sector response - Monetary policy has been accommodative; temporary extraordinary measures provided liquidity to the banking sector. - Recommendation: central bank should keep monetary policy data driven and continue to closely monitor credit and liquidity risks, including from loan restructuring, to safeguard financial stability. - The accommodative monetary stance remains appropriate, along with liquidity support for banks and financial markets as needed given the projected drop in inflation. ### Structural reforms and recovery agenda - Reforms to accelerate the transition to a private sector-led growth will be key in the post-pandemic period given limited fiscal space. - Other priority reforms recommended: - Strengthen governance, fiscal transparency and risk management. - Improve tax compliance. - Further strengthen the interest rate-based monetary policy framework. - Near-term agenda should fast-track efforts to strengthen fiscal risk management, including of state-owned enterprises (SOEs), and monitoring financial sector risks. ### Social and human capital impacts - Household consumption expected to drop by double-digits and remain depressed for the next decade; poorest 20 percent of rural households expected to suffer the most (14.2 percent drop in consumption through 2030). - Employment could be 8.4 percent lower in 2020, with large losses in all major sectors. - Disruptions in essential health services, immunization, and child services during March–May 2020 with persistent effects on institutional deliveries; many services recovered in subsequent months. - Vaccination programs (e.g., Polio3, Penta3, BCG) recorded less participation than in 2019; treatment for malaria, diarrhea, and pneumonia in under-five children fell below 2019 levels. - Education: an estimated 3.5 million children remained out of school for most of 2020; participation in remote learning fell over time; 63 percent of teachers expect higher dropout rates. - Research reference: students affected by closures might expect approximately 3 percent lower incomes over their lifetimes. ### Key projections and selected indicators (highlights from Table 1) - Real GDP: 8.5 (2019); -0.2 (2020); 5.7 (2021); 8.0 (2022); 6.8 (2023); 8.0 (2024); 7.5 (2025). - CPI (period average): 2.3 (2019); 8.0 (2020); 5.0 (2021); 5.0 (2022); 5.0 (2023); 5.0 (2024); 5.0 (2025). - Total revenue and grants (percent of GDP): 23.6 (2019); 23.1 (2020); 23.4 (2021); 23.8 (2022); 23.9 (2023); 23.3 (2024). - Expenditure (percent of GDP): 31.9 (2019); 32.9 (2020); 31.3 (2021); 30.2 (2022); 29.6 (2023); 28.3 (2024); 27.0 (2025). - Overall balance (percent of GDP): -8.2 (2019); -9.7 (2020); -7.9 (2021); -7.0 (2022); -5.8 (2023); -4.4 (2024); -3.7 (2025). - Total public debt incl. guarantees (percent of GDP): 59.0 (2019); 65.9 (2020); 71.1 (2021); 73.7 (2022); 73.3 (2023); 72.0 (2024); 70.0 (2025). - PV of total public debt incl. guarantees (percent of GDP): 44.5 (2019); 45.5 (2020); 48.8 (2021); 50.6 (2022); 50.9 (2023); 50.4 (2024); 49.3 (2025). - Current account balance (incl grants, percent of GDP): -10.6 (2019); -12.2 (2020); -12.5 (2021); -11.4 (2022); -9.6 (2023); -8.4 (2024); -8.0 (2025). - Gross international reserves: In millions of US$: 1,367 (2019); 1,643 (2020); 1,463 (2021); 1,556 (2022); 1,654 (2023); 1,834 (2024); 1,834 (2025). - Reserves in months of next year's imports: 4.4 (2019); 5.5 (2020); 4.3 (2021); 4.2 (2022); 4.1 (2023); 4.2 (2024); 4.2 (2025). ### Program status and recommendations - The Executive Board concluded the third review of Rwanda’s program supported by the IMF’s Policy Coordination Instrument (PCI) on December 16, 2020. - The PCI program was approved on June 28, 2019 to support the implementation of Rwanda’s National Strategy for Transformation (NST); the PCI expires in June 2022. - Staff recommends completion of the third review under the Policy Coordination Instrument. - Effective and transparent implementation of crisis-related measures and strong reporting and procurement practices are key to ensuring effectiveness and oversight of spending. - Contingency planning and fiscal risk management should guide policies given the uncertain outlook. - Continue pushing ahead with structural reforms to promote private sector-led and inclusive growth. ### Risks - Risks to the outlook are substantial given heightened uncertainty about the duration and magnitude of the COVID-19 shock and its economic impact. - The crisis has affected progress on structural reforms. - Near-term priorities shifted to supporting the economy through the crisis, causing deviations from program targets. _Source: Executive Board conclusion and staff report for Rwanda — Third Review under the Policy Coordination Instrument (December 16, 2020)._ ### 2. The pandemic shock slowed economic activity significantly in the first half of 2020, ### 1rwaea2021001 - 2. The pandemic shock slowed economic activity significantly in the first half of 2020, ### Macroeconomic impact and near-term developments - Economic activity: - Growth decelerated to 3.6 percent y/y in 2020Q1 from 6.1 percent in 2019Q1. - Output contracted by 12.4 percent in Q2. - Leading indicators signal a return to recovery in Q3, but at a much slower pace. - Demand and credit: - Demand for new loans dropped by 9 percent y/y in 2020H1. - Private sector credit continued to grow, supported by loan restructuring. - Inflation and monetary policy: - Headline inflation declined to 7.2 percent y/y in October (driven by a decrease in public transport fares and moderation of food inflation). - Monetary policy remained accommodative; the Monetary Policy Committee (MPC) kept the policy rate unchanged at 4.5 percent following its November meeting. - External and reserves: - The Rwandan franc depreciated against the dollar by 5.4 percent y/y at end-October. - Foreign exchange reserves were 5.7 months of import cover as of end-October, following disbursements by the Fund and other development partners. ### Sectoral and fiscal developments - Sectoral effects: - The Q2 contraction was broad-based with substantial output loss in services and industry. - Heavy rains and a decline in the pace of investment also affected activity in 2020Q1. - Fiscal position and implementation: - Revenue surprised on the upside due to slight overperformance in the first half of the fiscal year (July-December), sustained income tax collection, and a rebound of VAT revenues post-lockdown. - Current and capital appropriations were under-executed because of “lockdown savings” (delayed civil servant hires, lower operational expenses, fewer travels, slower infrastructure implementation). - Better-than-anticipated fiscal balance and significant mobilization of concessional financing from development partners helped close the FY 19/20 fiscal financing gap with a decline in net domestic financing. - Fiscal data and program targets (as reported): - Four out of five quantitative targets (QTs) for end-June 2020 and all standard continuous targets were met. - The QT related to debt-creating overall deficit was missed as it breached the program ceiling, mainly due to revenue shortfalls. - Two out of four reform targets (RTs) for end-June 2020 were met: - A comprehensive fiscal risk statement was published on time. - BNR’s monetary policy reports after April and August 2020 MPC meetings included macroeconomic projections underpinning the inflation forecast, in line with the RT. - Missed RTs included: diagnostic study on optimal RSSB asset allocation (not completed) and the mobile phone government securities issuance platform (not completed due to technical delays and travel restrictions). ### Financial sector resilience and risks - Banks and MFIs: - Banks’ non-performing loans (NPLs) ratio stood at 5.2 percent at end-September (slightly above the regulatory benchmark). - Banks restructured 45 percent of their loan portfolio. - Microfinance institutions (MFIs) restructured 21.9 percent of loans. - MFI NPLs rose to 12.8 percent at end-June (from 8 percent at end-March), prompting higher provisions and a sharp drop in earnings; MFI NPLs declined to 9.2 percent at end-September as small businesses resumed activity. - Other financial sectors: - The insurance and pension sectors remained solvent, liquid, and profitable, despite a deceleration of premiums collection and investment income. - Financial sector risks: - Continued exposure to hard-hit sectors (trade and real estate), reduced borrower repayment capacity, and deferred cash inflows from loan restructuring raised credit and liquidity risks. - Banks increased precautionary buffers even as BNR lowered the reserve requirement ratio. ### Outlook, projections, and scenarios - Growth: - Real GDP is expected to contract by 0.2 percent y/y (from an expansion of 8 percent projected pre-pandemic and 2 percent at the time of the RCF-2 request). - Recovery is projected to start from early 2021, led by industry and a rebound in private investment and consumption. - Growth is expected to return to pre-pandemic level by end-2023 as pandemic scars dissipate. - Inflation: - Inflationary pressures are forecast to abate from 2020Q4. - Average headline inflation is expected to reach the upper inner bound of the MPCC band in 2020. - Headline inflation is projected to drop to 2.5 percent in 2021. - External position: - The current account deficit is projected at 12.2 percent of GDP in 2020. - The expected 2020 balance-of-payments financing gap is expected to be closed with the IMF’s two RCF disbursements, concessional resources from development partners, and higher-than-anticipated remittances. - Reserves are projected to recover to marginally above 4 months of import cover in 2021–22, supported by improvements in the current account and recovery in FDI and remittances. - Fiscal trajectory: - Overall and debt-creating fiscal balances are expected to deteriorate in 2020 and gradually improve thereafter as stimulus measures are phased out. - Risks: - Downside risks are substantial, with the main short-term risk being a more protracted pandemic globally, regionally, or domestically that would deepen the crisis and delay recovery. - Under an adverse scenario, prolonged containment could require more protracted restrictions, resulting in a deeper contraction, intensified pressures on fiscal buffers and reserves, worsening public debt outlook, and higher probability of materialized contingent liabilities. - Upside factors include sustained lower oil prices and commitments to program reforms supporting medium-term growth. ### Program status and policy guidance - Policy Coordination Instrument (PCI): - The PCI objectives remain appropriate in the context of the COVID-19 shock. - The program is set to conclude in June 2022. - Near-term policy focus: supporting the economy through the crisis while preserving macroeconomic and financial stability, managing fiscal risks, and protecting vulnerable groups. - Program performance summary: - An interim performance update was issued to the Board in September as the second PCI review completion within the three-month window was not feasible due to COVID-19 response efforts. - Progress on several RTs was partly hampered by the pandemic and diverted resources to the response. *Source: IMF staff report (chapter content provided).* ### 10. The government is moving ahead with the ERP implementation. ### 10. The government is moving ahead with the ERP implementation. ### ERP implementation and COVID-19 spending - The ERP included about US$ 311 million (3.3 percent of GDP) in COVID-19-related spending spanning FY 19/20 (1.8 percent of GDP) and FY 20/21 (1.5 percent of GDP) on: - drugs, medical equipment, staff hires, and construction of health facilities to contain the pandemic; - a scaling up of existing social protection programs; - support to firms in hard-hit sectors under the ERF; - direct support to the national airline company; - public works on schools, roads, and sanitation facilities. - COVID-19-related spending under the ERP adopted in May and budgeted for FY 19/20 has already been spent. No absorption capacity bottlenecks have been reported in the execution of health and non-health spending. - Under-execution was mostly driven by delays in disbursing support to vulnerable businesses under the ERF, which could only start in July upon the RCF-2 disbursement (the ERF’s initial source of financing). - ERF disbursements to the hospitality sector have quickly picked up since then, but funds to small and medium enterprises (SMEs) have seen a slow take-up due to strict eligibility criteria and banks’ limited risk appetite. - Support to RwandAir has been slightly lower than anticipated, as the national airline managed to minimize its losses through operational savings and an increase in cargo revenue. ### Economic Recovery Fund (ERF): design and implementation challenges (Box 2) - ERF structure and amounts: - debt restructuring window for hotels: US$50 million; - working capital financing windows for large corporates, SMEs, and microbusinesses: US$47 million; - guarantee scheme for up to 75 percent of ERF loans to SMEs: US$3 million. - ERF operational model: - ERF funds are lent to banks, MFIs, and Savings and Credit Cooperative Organizations (SACCOs), at zero or low interest, who in turn provide loan restructuring for hotels or working-capital financing to firms deemed viable. - Beneficiaries are required to meet several criteria, including tax compliance and minimum magnitude of sales reductions. - Implementation challenges: - Disbursements through the working capital windows have been limited, in contrast to the hotels window. - Initial logistical challenges and overly stringent eligibility criteria—including on the minimum drop in sales and requirement for past tax compliance—were later relaxed; application volumes increased but remain limited. - Channeling funds mostly through the banking system exposes ERF to pre-existing structural obstacles to SME financial inclusion, including low bank risk appetite. - Banks’ interest margins are compressed under the ERF (6 to 8 percent vs above 11 percent outside the ERF), further reducing banks’ appetite. - SACCOs window performance: - The performance of the SACCOs window has recently improved and seems promising. - Uptake increased upon easing of eligibility criteria, with outstanding applications totaling 250 percent of the window’s capital. - The SACCOs’ higher ability to deal with informality suggests that a stronger focus on this window could provide dividends. ### Fiscal execution and FY 20/21 fiscal projections - Programmed FY 20/21 deficit and pandemic spending: - The programmed FY 20/21 deficit is 8.5 percent of GDP, lower than the approved budget target and the RCF-2 projections (8.8 and 9.5 percent of GDP, respectively). - The FY 20/21 fiscal framework accommodates COVID-19-related spending needs amounting to 2.9 percent of GDP, i.e., 1.4 percentage points above the original ERP allocation for FY20/21 due to the pandemic’s larger and more protracted expected impact. - The increase in COVID-19-related spending reflects the carry-over of undisbursed ERF funds from FY19/20 and about US$50 million in additional ERF endowment mobilized from development partners. - Revisions relative to RCF-2: - Upward revision on tax revenues: 1.3 percent of GDP owing to one-off increases in consumption taxes. - Grants increased by 1.5 percent of GDP due to the reallocation of World Bank budget support away from loans and towards grants, following the change in Rwanda’s debt risk rating from low to moderate. - Fiscal tables (selected lines, percent of GDP): - Revenue and grants: 23.2, 20.4, 20.6, 23.7 (columns correspond to 1st Review, Budget, RCF-2, 2020/21 projection in the source table). - Total expenditure and net lending: 28.8, 29.2, 30.1, 32.2. - Of which: Covid-19 related spending (total): --, --, 1.5, 2.9. - Overall balance (incl. grants, commitment basis): -5.6, -8.8, -9.5, -8.5. - Overall balance (incl. grants, cash basis): -5.9, -9.2, -9.8, -8.9. - Financing: 5.9, 9.2, 7.7, 8.9. - Foreign financing (net): 5.0, 6.7, 5.9, 6.7. - Net domestic financing: 1.0, 2.5, 1.8, 2.1. - Cash management and oversight: - To protect priority spending under the ERP and close financing gaps, the government will continue to rely on well-functioning cash management and spending control practices set up under the Organic Budget Law (OBL) and oversight from the Debt and Treasury Management committees. ### Recalibration of the PCI fiscal framework and consolidation path - Temporary changes and anchors: - The PCI maximum deficit rule of 5.5 percent will be suspended in favor of a tailored deficit path matching the evolving outlook and budget needs. - Staff estimates suggest a nominal debt anchor of 65 percent of GDP would be appropriate. This anchor remains consistent with the EAMU’s PV of debt ceiling of 50 percent, as existing concessionality terms suggest it would correspond to a PV of debt of around 45 percent of GDP. - Agreed fiscal consolidation path: - Authorities adopted the new debt anchor and agreed with staff on a fiscal consolidation path that balances recovery support and NST priorities while safeguarding debt sustainability. - The agreed path foresees a decline in the headline deficit starting from FY20/21, while accommodating additional COVID-19 spending of 2.9 percent of GDP relative to RCF-2 (and ongoing public investment in the new airport). - A large deficit reduction of 1.4 percentage points of GDP through FY21/22 mainly reflects the gradual phasing-off of COVID-19-related spending and is expected to carry limited fiscal effort and drag on growth. - Once growth returns to pre-pandemic levels in 2023, consolidation should be underpinned by growth-friendly measures to support debt converging to the medium-term anchor by 2028. - Main elements to be developed in the next PCI review: revenue gains via a Medium-Term Revenue Strategy (MTRS), rationalization of current spending, and re-prioritization of public investment. Consideration could be given to announcing or legislating these measures before the end of the program to support credibility. ### Debt sustainability and liquidity risks - Debt assessment: - An updated Debt Sustainability Analysis (DSA) indicates a moderate risk of debt distress. - Timely return to a credible fiscal consolidation path after the COVID-19 crisis and revisions in the debt management strategy to increase liquidity buffers and smooth out debt service are critical to reducing debt-related risks. - Specific risks and mitigation: - Rolling over the 10-year Eurobond issued in 2013 leads to a one-off breach of the debt service-to-revenue ratio under the baseline scenario in 2023. - Higher gross financing needs compared to the 2019 DSA pose a medium-term liquidity risk. - Authorities are exploring mitigating measures such as pre-financing of debt and buyback of debt falling due to reduce the rollover risk and debt service burden in 2023. ### Domestic revenue mobilization and tax administration - Tax compliance and relief: - Authorities sustained and strengthened tax compliance during the pandemic with temporary tax relief measures that provided some breathing space to hard-hit taxpayers; estimated limited tax expense so far and some positive impact on sustaining compliance. - RRA measures: strengthening data analytics, disseminating more user-friendly electronic billing machine (EBM) software to provide real time information on VAT transactions, and building capacity to address transfer pricing, base erosion and profit shifting. - Medium-Term Revenue Strategy (MTRS): - Authorities expect to finalize by end-year all diagnostic studies to inform a three-year MTRS and to have it launched by end-June 2021. - The original goal of increasing revenue-to-GDP ratios by 1 percentage point each year over 4 years under the MTRS would not be feasible owing to the pandemic. In the absence of new tax measures, the projected increase during this period is less than one ppt under the baseline scenario. - With Fund technical assistance (TA), authorities plan to revisit MTRS revenue goals, timeline, and measures to support NST goals and growth-friendly fiscal consolidation. - Quantified tax relief impact: - RRA estimates combined revenue forgone from tax relief measures until end-December 2020 to amount to less than RWF 2 billion, less than 0.02 percent of GDP. ### Fiscal risks, transparency, and governance - Fiscal risk management steps: - Initial measures from the 1st PCI Review achieved: setup of a fiscal risk committee (FRC), publication of a comprehensive fiscal risk statement (FRS), and compilation of a fiscal risk registry. - Near-term focus: identification, quantification and mitigation of fiscal risks from SOEs. - With Fund TA, authorities will start bi-annual health-check assessments of fiscal risks from SOEs to be submitted with remedial measures to the FRC by end-May 2021 (RT). - Authorities intend to clarify the SOE legal framework and strengthen oversight. Additional PPP risk information will be collected and added to the FRS. - Ways to strengthen the legal mandate of the FRC and the fiscal risk framework will be explored as part of the review of the OBL. - Fiscal transparency improvements: - Expanding coverage of fiscal reporting in GFSM 2014 format and compiling a financial balance sheet of the nonfinancial public sector (NFPS). - Quarterly budget execution reports (BER) for the budgetary central government (BCG) started to be published during FY19/20 using GFSM 2014. BER coverage will be expanded to the general government, excluding RSSB, with the Q1 FY20/21 report due by end-December 2020 (RT). - Authorities have compiled NFPS financial balance sheets for SOEs and RSSB and are working on central and local government; they plan a timeline to expand quarterly fiscal reports and annual financial balances in the next review. - Authorities plan to request Fund TA to assess progress toward implementing recommendations from the IMF’s 2019 Fiscal Transparency Evaluation (FTE) and committed to publish both TA reports shortly after the follow-up mission. - Pandemic expense monitoring and procurement transparency: - A financing item “COVID-19 response” was created under the chart of accounts for tracking crisis-related spending with a separate bank account under the treasury single account system to receive all contributions to the ERP. - Authorities committed that all expenditures, including pandemic-related, will be audited by the Office of the Auditor General and published by May 2021 according to the Constitution and OBL. - Staff noted strengths in the procurement framework but highlighted shortcomings in collection and verification of beneficial ownership per recent AML mutual evaluation reports; staff encouraged steps to ensure adequate transparency concerning beneficial ownership, e.g., introducing a provision on beneficial ownership information from bidders as part of public procurement tenders and making this information available on the government’s e-procurement website. LEG staff stands ready to provide TA in this area. *Source: Rwandan Authorities, and IMF staff estimates and projections.* ### 19. Staff and the authorities agreed that BNR’s monetary policy ### Staff and the authorities agreed that BNR’s monetary policy ### Monetary policy stance and inflation outlook - Staff and the authorities agreed that BNR’s monetary policy stance is appropriate and should continue to be data-driven. - Year-on-year headline inflation: - Projected to remain above the benchmark in 2020Q4 based on staff’s quarterly projection model. - Expected to sharply decline in q/q terms, helped by the projected normalization of transport fares amid subdued foreign demand and international prices. - Absent price pressures from supply chain disruptions, y/y headline inflation is expected to decline going forward, including from base effects. - The corresponding 12-month average y/y headline inflation is expected to reach the MPCC inner upper bound in December 2020. - Authorities and staff agreed on the need to continue closely monitoring price developments given uncertainties. ### Monetary policy framework and transmission - BNR progress and capacity building: - Continued implementation of the interest rate-based monetary policy framework. - Significant headway in building Forecasting and Policy Analysis System (FPAS) capacity and incorporating model projections in the monetary policy decision-making process. - Ongoing IMF TA will continue to strengthen BNR’s FPAS, including by improving the quality of monetary policy reports. - Monetary transmission and market development: - Monetary policy transmission mechanism is improving, with short-term rates broadly tracking the policy rate and increasing interbank market activity. - Further benefits expected from steps to deepen money and bond markets, including implementation of true repo and the Global Master Repurchase Agreement (end-June 2021 RT), capacity building for market players, and a buy-back mechanism for government securities. - Rollout of the electronic subscription platform for government bonds (missed RT reset to end-June 2021) should promote securities trading by reducing transaction costs for retail investors. ### Exchange rate policy - Policy stance: - A market-determined exchange rate is critical for ensuring external sustainability. - Authorities reiterated commitment to exchange rate flexibility, consistent with the interest rate-based monetary policy framework. - Foreign exchange market interventions limited to minimizing excessive exchange rate volatility. - Recent pressures and reserves assessment: - Depressed export receipts, remittances and FDI inflows have impacted banks’ NFA. - Gradual resumption of economic activity has put pressure on the exchange rate, prompting BNR to increase its foreign exchange sales to banks to moderate excessive exchange rate volatility. - Staff considers international reserves in the range of 4 to 5 months of prospective imports as adequate (Annex I, ⁋9). - External position and policy implications: - Rwanda’s external position in 2019 was weaker than implied by fundamentals and desirable policy settings (Annex I). - Policy actions to implement a fiscal consolidation and structural reforms to improve the business climate and boost competitiveness would bring the current account to a level consistent with fundamentals. - Allowing exchange rate flexibility remains crucial to absorb external shocks. ### Financial stability and inclusion - Financial stability monitoring and supervisory actions: - Credit and liquidity risks should be closely monitored to safeguard financial sector stability. - BNR issued guidance to banks and MFIs on proper classification and provisioning of COVID-19-related loan restructuring, instituted quarterly reporting requirements, and updated its electronic platform for collecting supervisory data. - Lending concentration in the real estate sector is a vulnerability due to dropped commercial property occupancy rates and depressed real estate prices. - Ongoing IMF TA to upgrade BNR’s stress-testing framework should benefit heightened supervision. - BNR committed to deploying additional tools as warranted, including releasing the capital conservation and domestic systematically important banks (DSIBs) buffer, and requiring capital restoration plans from banks on a case-by-case basis. - Financial inclusion initiatives: - National Financial Inclusion Strategy (2019−24) and initiatives to develop long-term savings schemes, achieve interoperability across payment issuers, automate SACCOs business operations, and de-risk agriculture are being rolled out. - Steps to increase digital financial services, agent banking and insurance and pension penetration, including for the informal and agriculture sectors, should support inclusion. ### Digitalization and financial inclusion during the pandemic (Box 3 findings) - Temporary measures and transaction behavior: - Banks and mobile network operators removed charges on mobile money transfers for three months; fees were eliminated three days before the lockdown. - Transaction limits were raised. - Weekly person-to-person (P2P) transfers soared to RWF 41 billion late-April, four times the pre-lockdown size. - Transfers between bank accounts and mobile wallets (push and pull services) tripled over the same period. - Mobile money transactions remained high in 2020Q3 despite re-instatement of charges on June 22. - Longer-term implications: - Growth in digital transactions could accelerate Rwanda’s move to a cashless economy and strengthen financial inclusion. - Removal of mobile transfer charges bears a cost for banks and MNOs that is yet to be assessed. - According to the 2020 FinScope survey, 77 percent of adults in Rwanda use formal financial products and services, against 68 percent in 2016, with the objective of reaching 90 percent by 2024 under the National Financial Inclusion Strategy. - Greater adoption of mobile money has been a key driver, but more needs to be done to reach vulnerable groups such as women, youth, and rural residents. ### Structural policies: sustaining inclusive private sector-led growth - Pandemic risks and SDGs: - The pandemic risks undermining Rwanda’s drive to meet Sustainable Development Goals (SDGs). - Staff expects additional annual spending needs to meet the SDGs by 2030 to increase post-COVID-19 by at least 1 percentage point of GDP from the 18.3 percent pre-COVID-19 estimate. - NST priorities and private sector focus: - Authorities remain committed to NST priorities centered on the private sector, knowledge-based economy, innovation, higher value-added services, industries, and natural resources. - Continued strategic investments, including in the new Bugesera airport, are planned to leverage previous tourism sector investments with an expectation of delayed but eventual recovery. - Shift to private sector-led growth is more urgent given limited fiscal space exacerbated by COVID-19; acceleration of policies to promote private sector development is needed to return to the pre-COVID-19 growth trajectory. ### Program modalities, conditionality, and capacity development - Monitoring and targets: - Program monitored semi-annually through quantitative, standard continuous, and reform targets, and a monetary policy consultation clause. - QTs set for end-December 2020 and end-June 2021 in line with the baseline macroeconomic framework. - Conditionality updates (selected): - Given the moderate risk of debt distress, a limit on the present value of new external public and publicly guaranteed debt is introduced. - New RT on conducting a “health-check” assessment of SOEs fiscal risks with Fund TA support and submitting outcomes to the fiscal risk committee proposed for end-May 2021. - Missed and reset RTs: several missed end-2019 and end-June 2020 RTs proposed to be reset to end-December 2020 or end-June 2021 (automation of tax refund verification; diagnostic study on optimal RSSB asset allocation; platform for issuing government securities using mobile phones; study on consumer payment behaviour). - Program financing and risks: - Rwanda is not seeking financial assistance from the Fund and the program is fully financed over the remainder of the arrangement. - Development partners committed substantial external financing in the form of grants and highly concessional loans over the next 12 months under the baseline scenario. - Risks: pandemic could lead to much lower growth and fiscal revenues, higher spending needs, and pressures on fiscal/external balances and debt sustainability. - Risk mitigation: robust health response, ERP implementation, transparent reporting of pandemic-related aid and expenditures, well-functioning cash management and spending control, oversight from Debt and Treasury Management committees, strong track record in Fund-supported programs. - Capacity Development (CD): - Rwanda is an extensive consumer of IMF TA with a strong track record of implementation. - Recent CD included remote training to develop inflation projections incorporating COVID-19 impact, producing macro-fiscal scenarios using FAD’s COVID-19 fiscal stress test module, and designing and implementing an MTRS. ### Staff appraisal and recommendations - Economic impact and outlook: - The pandemic interrupted strong economic performance; shock transmitted via lower external demand, weaker FDI and remittances, near cessation of tourism, disruptions in regional and global supply chains, and domestic supply constraints. - Growth in 2020 expected to be -0.2 percent, down from 9.4 percent in 2019. - Economic outlook highly uncertain with risks tilted to the downside. - Assessment of authorities’ response: - Authorities responded promptly with well-designed measures to support households, preserve jobs, boost healthcare spending, and provide liquidity and borrower relief. - Staff supports accommodating additional spending needs and a commitment to adopt gradual and growth-friendly fiscal consolidation as the crisis abates. - Policy priorities going forward: - Focus on containing fiscal and financial sector risks, with close monitoring of fiscal risks stemming from SOEs and state-guaranteed loans, and monitoring credit and liquidity risks. - Adopt sound contingency planning: consider reprioritization of spending and additional concessional financing; delay execution of non-priority spending while moving ahead with priority spending until financing is secured. - Maintain transparency and accountability of COVID-19-related spending, continue ex-post audits and publication of expenditures, and consider publishing beneficial ownership information for companies awarded government procurement contracts to strengthen governance. - Adopt a credible and growth-friendly fiscal consolidation within a reasonable timeframe after the crisis abates; absent large economic surprises, the fiscal deficit in FY20/21 should be contained to about 8.5 percent of GDP. - Fiscal consolidation strategy should center on measures to re-ignite domestic revenue mobilization, streamline non-priority spending, and re-prioritize public investment; consider announcing and legislating these measures before the end of the program to support credibility. - Staff welcomes authorities’ commitment to key structural reforms: strengthening fiscal transparency, tax compliance, and the interest rate-based monetary framework to ensure credible macroeconomic policies and support a strong post-crisis recovery. *Source: IMF staff and Rwandan authorities (content unit 1rwaea2021001).* ### 39. Staff supports the completion of the third review based on the authorities’ ### 1rwaea2021001 - 39. Staff supports the completion of the third review based on the authorities’ ### Staff position - Staff supports the completion of the third review based on the authorities’ appropriate actions to address the economic fallout from the pandemic, their commitments to reform and to implement a credible fiscal path to bring down debt as soon as the crisis abates. ### Macroeconomic outlook and projections (selected) - Real GDP: 2019: 8.5; 2020: 9.4; 2021 (RCF-2 Act.): 9.4; 2021 (1st Rev.): 8.0; 2022 (RCF-2Proj.): 2.0; 2022 (1st Rev.): -0.2; 2023 (RCF-2Proj.): 8.0; 2023 (1st Rev.): 6.3; 2024 (RCF-2Proj.): 5.7; 2024 (Proj.): 8.0; 2025 (Proj.): 7.5 - GDP deflator (period): 2019: 1.8; 2020: 0.4; 2021 (RCF-2 Act.): 0.4; 2021 (1st Rev.): 5.6; 2022 (RCF-2Proj.): 6.5; 2023 (RCF-2Proj.): 8.3; 2024 (Proj.): 5.0; 2025 (Proj.): 5.0 - CPI (period average): 2019: 2.3; 2020: 2.4; 2021 (RCF-2 Act.): 2.4; 2021 (1st Rev.): 5.4; 2022 (RCF-2Proj.): 6.9; 2023 (RCF-2Proj.): 8.0; 2024 (Proj.): 5.0; 2025 (Proj.): 5.0 - CPI (end period): 2019: 5.7; 2020: 6.7; 2021 (RCF-2 Act.): 6.7; 2021 (1st Rev.): 5.0; 2022 (RCF-2Proj.): 5.0; 2023 (RCF-2Proj.): 5.0; 2024 (Proj.): 5.0; 2025 (Proj.): 5.0 ### Fiscal position and public debt (selected) - Total revenue and grants (percent of GDP): 2019: 23.6; 2020: 23.6; 2021 (RCF-2 Act.): 23.1; 2021 (1st Rev.): 20.1; 2022 (RCF-2Proj.): 23.1; 2023 (RCF-2Proj.): 22.9; 2024 (Proj.): 20.7; 2025 (Proj.): 23.4 - Tax revenue (percent of GDP): 2019: 16.6; 2020: 16.7; 2021 (RCF-2 Act.): 16.7; 2021 (1st Rev.): 16.7; 2022 (RCF-2Proj.): 13.5; 2023 (RCF-2Proj.): 15.4; 2024 (Proj.): 16.5; 2025 (Proj.): 15.9 - Total expenditure (percent of GDP): 2019: 31.9; 2020: 31.8; 2021 (RCF-2 Act.): 31.8; 2021 (1st Rev.): 29.0; 2022 (RCF-2Proj.): 31.7; 2023 (RCF-2Proj.): 32.9; 2024 (Proj.): 29.2; 2025 (Proj.): 27.0 - Current expenditure (percent of GDP): 2019: 15.9; 2020: 15.6; 2021 (RCF-2 Act.): 15.6; 2021 (1st Rev.): 14.5; 2022 (RCF-2Proj.): 15.7; 2023 (RCF-2Proj.): 15.7; 2024 (Proj.): 15.0; 2025 (Proj.): 13.5 - Capital expenditure (percent of GDP): 2019: 12.7; 2020: 13.2; 2021 (RCF-2 Act.): 13.2; 2021 (1st Rev.): 12.1; 2022 (RCF-2Proj.): 12.1; 2023 (RCF-2Proj.): 12.7; 2024 (Proj.): 11.3; 2025 (Proj.): 11.5 - Primary balance (percent of GDP): 2019: -6.9; 2020: -6.8; 2021 (RCF-2 Act.): -6.8; 2021 (1st Rev.): -4.2; 2022 (RCF-2Proj.): -9.9; 2023 (RCF-2Proj.): -8.0; 2024 (Proj.): -4.9; 2025 (Proj.): -3.0 and -2.0 (two entries shown) - Overall balance (percent of GDP): 2019: -8.2; 2020: -8.1; 2021 (RCF-2 Act.): -8.1; 2021 (1st Rev.): -5.9; 2022 (RCF-2Proj.): -11.6; 2023 (RCF-2Proj.): -9.7; 2024 (Proj.): -6.3; 2025 (Proj.): -3.7 - Excluding grants (overall balance percent of GDP): 2019: -12.7; 2020: -12.3; 2021 (RCF-2 Act.): -12.3; 2021 (1st Rev.): -10.0; 2022 (RCF-2Proj.): -16.2; 2023 (RCF-2Proj.): -15.5; 2024 (Proj.): -13.6; 2025 (Proj.): -10.0 to -8.0 (range shown) - Debt-creating overall balance (excl. PKO) (percent of GDP): 2019: -6.7; 2020: -6.6; 2021 (RCF-2 Act.): -6.6; 2021 (1st Rev.): -5.7; 2022 (RCF-2Proj.): -11.3; 2023 (RCF-2Proj.): -9.1; 2024 (Proj.): -6.4; 2025 (Proj.): -3.7 - Net domestic borrowing (percent of GDP): 2019: 2.7; 2020: 0.9; 2021 (RCF-2 Act.): 0.8; 2021 (1st Rev.): 0.7; 2022 (RCF-2Proj.): 2.5; 2023 (RCF-2Proj.): 1.2; 2024 (Proj.): 2.0; 2025 (Proj.): 0.5 - Total public debt incl. guarantees (percent of GDP): 2019: 59.0; 2020: 58.5; 2021 (RCF-2 Act.): 58.1; 2021 (1st Rev.): 58.9; 2022 (RCF-2Proj.): 68.1; 2023 (RCF-2Proj.): 65.9; 2024 (Proj.): 59.8; 2025 (Proj.): 70.0 (and other year entries up to 73.7) - PV of total public debt incl. guarantees (percent of GDP): 2019: 44.5; 2020: 42.8; 2021 (RCF-2 Act.): 42.8; 2021 (1st Rev.): 43.1; 2022 (RCF-2Proj.): 48.2; 2023 (RCF-2Proj.): 45.5; 2024 (Proj.): 49.3; 2025 (Proj.): 50.4 ### Monetary and financial sector (selected) - Broad money (M3) growth (year on year): 2019: 21.8; 2020: 15.4; 2021 (RCF-2 Act.): 15.4; 2021 (1st Rev.): 21.9; 2022 (RCF-2Proj.): 5.1; 2023 (RCF-2Proj.): 11.3; 2024 (Proj.): 17.4; 2025 (Proj.): 12.8 - Reserve money growth (year on year): 2019: 21.5; 2020: 17.2; 2021 (RCF-2 Act.): 17.2; 2021 (1st Rev.): 22.1; 2022 (RCF-2Proj.): 5.8; 2023 (RCF-2Proj.): 12.1; 2024 (Proj.): 17.8; 2025 (Proj.): 12.8 - Credit to non-government sector (year on year): 2019: 17.6; 2020: 12.6; 2021 (RCF-2 Act.): 12.6; 2021 (1st Rev.): 14.8; 2022 (RCF-2Proj.): 10.2; 2023 (RCF-2Proj.): 14.1; 2024 (Proj.): 7.9; 2025 (Proj.): 14.0 - M3/GDP (percent): 2019: 27.9; 2020: 26.3; 2021 (RCF-2 Act.): 26.3; 2021 (1st Rev.): 29.8; 2022 (RCF-2Proj.): 25.4; 2023 (RCF-2Proj.): 27.0; 2024 (Proj.): 30.9; 2025 (Proj.): 31.3 - Monetary Survey – Broad money (billions of RwF): 2019 Dec.: 2,220; 2020 Dec.: 2,391; 2021 Dec.: 2,631; 2022 Dec. (RCF-2Proj.): 3,074; 2023 Jun. (RCF-2Proj.): 2,512; 2024 Dec. (Proj.): 4,130; 2025 Dec. (Proj.): 5,353 - Financial soundness indicators (selected): NPLs/gross loans ranged 6.8–5.2 across reporting dates; Core capital to risk-weighted assets ranged 19.5–21.3 across dates shown. ### External sector and balance of payments (selected) - Current account balance (incl. official transfers, millions of US$): 2019: -1,254; 2020: -1,077; 2021 (1st Rev.): -1,745; 2021 (RCF-2Proj.): -1,261; 2022 (RCF-2Proj.): -1,077; 2023 (RCF-2Proj.): -1,116; 2024 (Proj.): -1,334; 2025 (Proj.): -1,198 - Trade balance (millions of US$): 2019: -1,473; 2020: -1,202; 2021 (1st Rev.): -1,144; 2022 (RCF-2Proj.): -1,511; 2023 (RCF-2Proj.): -1,286; 2024 (Proj.): -1,122; 2025 (Proj.): -1,828 - Exports (f.o.b., millions of US$): 2019: 1,232; later year projections include 1,418; 1,690; 1,942; 2,219; 2,558; 2,820 - Imports (f.o.b., millions of US$): 2019: 2,705; projected values include 2,930; 3,390; 3,763; 4,052; 4,376; 4,648 - Gross international reserves (millions of US$): 2019: 1,367; 2020: 1,440; 2021 (RCF-2 Act.): 1,440; 2021 (1st Rev.): 1,553; 2022 (RCF-2Proj.): 1,207; 2023 (RCF-2Proj.): 1,643; 2024 (Proj.): 1,834; 2025 (Proj.): 1,921 - Reserves (months of next year's imports): 2019: 4.4; 2020: 5.8; 2021 (RCF-2 Act.): 5.8; 2021 (1st Rev.): 4.6; 2022 (RCF-2Proj.): 4.0; 2023 (RCF-2Proj.): 5.5; 2024 (Proj.): 4.2; 2025 (Proj.): 4.2 - Current account balance (percent of GDP) (memorandum): 2019: -12.4; 2020: -9.9; 2021 (1st Rev.): -16.7; 2022 (RCF-2Proj.): -12.2; 2023 (RCF-2Proj.): -9.1; 2024 (Proj.): -10.5; 2025 (Proj.): -8.0 ### Budgetary central government flows (selected, GFSM 2014 presentation) - Revenue (billions of Rwandan Francs): FY19/20 Act.: 2,250; FY20/21 Act.: 2,082; FY21/22 1st Review: 2,193; FY22/23 RCF-2Proj.: 2,551; FY23/24 1st Review: 2,116; FY24/25 (Proj.): 3,807 - Taxes (billions of RwF): FY19/20 Act.: 1,553; FY20/21 Act.: 1,374; FY21/22 1st Review: 1,476; FY22/23 RCF-2Proj.: 1,786; FY23/24 1st Review: 1,424; FY24/25 (Proj.): 2,588 - Grants (billions of RwF): FY19/20 Act.: 403; FY20/21 Act.: 422; FY21/22 1st Review: 427; FY22/23 RCF-2Proj.: 486; FY23/24 1st Review: 437; FY24/25 (Proj.): 802 - Net lending / borrowing (overall balance, including grants, billions of RwF): FY19/20 Act.: -587; FY20/21 Act.: -1,006; FY21/22 1st Review: -741; FY22/23 RCF-2Proj.: -606; FY23/24 1st Review: -903; FY24/25 (Proj.): -515 - Net acquisition of nonfinancial assets (capital expenditure, billions of RwF): FY19/20 Act.: 984; FY20/21 Act.: 1,108; FY21/22 1st Review: 1,033; FY22/23 RCF-2Proj.: 1,124; FY23/24 1st Review: 1,007; FY24/25 (Proj.): 1,540 ### Key risks and fiscal policy context (as reflected in tables) - Large swings in the overall balance: overall balance (percent of GDP) ranges from -5.9 to -11.6 across years shown. - Public debt trajectory: total public debt incl. guarantees rises to 75.7 in one projection year and falls in others, with PV of debt similarly variable (e.g., 44.5; 52.5; 50.9 in different years). - External financing and reserves: projected gross international reserves vary from 1,207 to 1,921 million US$, with reserves coverage in months generally between 4.0 and 5.8. ### Implicit policy emphasis (derived from staff position and reported projections) - Authorities committed to reforms and a credible fiscal path to bring down debt as soon as the crisis abates. - Continued monitoring of fiscal consolidation given large projected deficits and debt-creating balances (excl. PKO) across the projection period. *Sources: Rwandan authorities and IMF staff estimates and projections.* ### 1. Ceiling on the debt-creating overall balance, including grants ### 1. Ceiling on the debt-creating overall balance, including grants ### Program quantitative targets and outcomes - Ceiling on the debt-creating overall balance, including grants: reported indicators show met/not met flags across periods with values displayed as: - -276-32097-417 - -303Met-589-60097-697-729Not Met - Floor on stock of Net Foreign Assets: - 980972-93 - 8791041Met - 858910-92 - 8181,071Met - Ceiling on net accumulation of domestic arrears: - 000Met00 - -1.4Met - Continuous Targets - Ceiling on stock of external payment arrears (US$ million): - 3 - 00... - 0Met00...0Met ### Monetary policy consultation band and inflation targets - CPI Inflation target rows show: - 5.05.02.4 Met5.05.06.3Met - Inflation bounds (percent): - Inflation, upper inner-bound, percent: 8.08.08.08.0 - Inflation, lower inner-bound, percent: 2.02.02.02.0 - Inflation, upper bound, percent: 9.09.0 9.09.0 - Inflation, lower bound, percent: 1.01.0 1.01.0 ### Memorandum items (cumulative from June 30, 2019 unless otherwise noted) - Total priority spending: - 2 - 411411471Met885885949Met - Floor on domestic revenue collection: - 2,5 - 823779812Met1,7261,6781,614Not Met - Total budget support (US$ million): - 2 - 439477383617742 - 845 - Budget support grants (US$ million): - 6 - 196222101293 - 339188 - Budget support loans (US$ million): - 243255282324403 - 657 - RWF/US$ program exchange rate: - 879923 - 923879923923 - Stock of new external debt contracted or guaranteed by nonfinancial public enterprises (US$ million): - 3 - 700700440Met700700 ### Notes and adjusters (as presented) - Sources: Rwandan authorities and IMF staff estimates and projections. - Footnotes excerpted exactly: - 1 All items including adjusters are defined in the Technical Memorandum of Understanding (TMU). - 2 Numbers are cumulative from June 30, 2019. - 3 Continuous targets. - 4 When the end-of period year-on-year average inflation is above/below the outer band of the upper/lower bound, a formal consultation with the Executive Board would be triggered. - 5 Floor is adjusted to exclude UN peace keeping operations, in line with the TMU. - 6 The adjuster target inadvertently and incorrectly included PKO reimbursements. Had the target excluded PKO reimbursements, in line with the TMU, it would amount to US$ 123 million (end-December 2019) and US$155 million (end-June 2020) and the adjusted program targets for the ceiling on the debt creating overall balance, including grants and the floor on the stock of net foreign assets would amount to RWF -340 billion and RWF 965 billion, respectively (end-December 2019) and to RWF -614 billion and RWF 934 billion, respectively (end-June 2020). The assessment of both QTs under the corrected adjusted targets would remain the same. - Reporting periods noted: end-December 2019 end-June 2020 ### Program review schedule (Policy Coordination Instrument, 2019–22) - 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 ### Reform targets (June 2019 – June 2020) — selected actions and status - Fiscal: - Produce annual tax expenditure report with updated methodology, and a description of broad categories of beneficiaries — end-Jun. 2019 — Met — Objective: Improve DRM - Procure an IT system that will capture all RSSB processes — end-Jun. 2019 — Met — Objective: Improve resource efficiency - Produce a report outlining detailed options for improving functioning of VAT, including measures that could be implemented in FY20/21 — end-Dec. 2019 — Met — Objective: Improve DRM - Automating the risk based verification process for refund claims — end-Dec. 2019 — Not Met — Objective: Improve DRM - Begin producing quarterly budget execution reports in GFS 2014 format — end-Dec. 2019 — Met — Objective: Improve fiscal transparency - Produce a comprehensive fiscal risk analysis statement — end-Jun. 2020 — Met — Objective: Mitigate fiscal risks - Contract a diagnostic study on optimal RSSB asset allocation — end-Jun. 2020 — Not Met — Objective: Improve resource efficiency - Monetary and Financial: - Improve communication for monetary policy by organizing quarterly outreach after each MPC meeting, including roundtable discussions with CEOs of commercial banks and other financial institutions, as well as other interested stakeholders — end-Dec. 2019 — Met — Objective: Support new monetary policy framework - Publish macro projections for MPC decision making in quarterly inflation reports, according to best practices established by other central banks — end-Jun. 2020 — Met — Objective: Support new monetary policy framework - Introduce a platform for issuing government securities using mobile phones — end-Jun. 2020 — Not Met — Objective: Deepen financial markets *Source: Rwandan authorities and IMF staff; excerpted from the program tables and annexes in the provided chapter.* ### External Sector Assessment — key findings - Context and recent performance: - The current account deficit widened to 12.4 percent of GDP in 2019, from 10.3 percent of GDP in 2018. - Exports grew by 9 percent in 2019, driven mainly by non-traditional exports despite price declines for traditional exports (tea, coffee, and minerals). - Foreign direct investment (FDI) and public-sector external borrowing increased by 10 percent and 20 percent, respectively, in 2019. - International reserves increased to US$1,440 million by end-2019; reserves estimated to be 5.7 months of prospective import coverage in one presentation, and 4.8 months in another exposition. - COVID-19 outlook: - The COVID-19 pandemic is expected to negatively affect Rwanda’s external position in 2020: current account deficit expected to widen significantly due to a marked decline in goods exports, a temporary stop in tourism, and lower remittance inflows. - International reserves expected to decrease as a result of a deteriorating current account deficit and lower FDI and other financial flows. - Net international investment position: - External liabilities posted 71 percent of GDP in 2019, exceeding reserve assets by 58 percentage point of GDP; NIIP is expected to continue deteriorating partly on account of loan disbursements from development partners. - Real effective exchange rate and model assessments: - The real effective exchange rate (REER) of the Rwanda Franc appreciated in late 2019 due to a rise in domestic inflation despite steady nominal depreciation. - EBA-Lite results (2019) summary: - CA-Actual: -12.4 - Cyclical Contributions (from model): -0.3 - Adjusted CA: -12.1 - CA Norm (from model) 1/: -8.4 - CA Gap: -3.7 (CA model) and 0.9 (REER model) - REER Gap (in percent): 18.0 and -4.6 (contextual model outputs) - Elasticity: -0.20 - Overall assessment: external position in 2019 was weaker than implied by fundamentals and desirable policy settings. - Competitiveness indicators: - World Economic Forum’s 2019 Global Competitiveness Index rankings (selected): - Rwanda globally ranked 36th out of 141 countries in institutional quality, and 46th in business dynamism. - Main weaknesses: labor skills and innovation capability; market size is a constraint. - Adequacy of international reserves: - ARA-CCE indicates an optimal range of 3.8−4.9 months of imports with a flexible exchange rate classification, and 10.8−12.4 months with a fixed exchange rate classification. - Staff considers international reserves in the range of 4.0–5.0 months optimal for Rwanda. ### Risk Assessment Matrix — principal risks and policy responses (selected) - Potential Domestic Risks: - Unexpected shift in the Covid-19 pandemic — Relative Likelihood: High — Expected Impact if Realized: High - Policy responses: - Accelerate targeted government fiscal and financial interventions to support domestic businesses (stimulus and safety nets) and the health response to pandemic in line with the Economic Recovery Plan (ERP). - Prioritize public infrastructure projects with high fiscal multipliers and value-for-money. - Strengthen coordination efforts at regional level, particularly at the land borders. - Continue mobilizing the international community to provide support. - Widespread social discontent and political instability — Relative Likelihood: Low — Expected Impact if Realized: High - Policy responses: - Increase access and benefits, improve targeting of existing social safety nets. - Bring forward measures to create jobs and promote vocational training. - Pursue tax reforms to broaden tax base. - Higher frequency and severity of natural disasters related to climate change — Relative Likelihood: Medium/Low — Expected Impact if Realized: Medium - Policy responses: - Include contingency spending plans in fiscal framework and strengthen food security programs. - External Risks: - Oversupply and volatility in the oil market — Relative Likelihood: Medium — Expected Impact if Realized: Medium - Policy responses: - Ensure strategic fuel reserves are adequate. - Intensified geopolitical tensions and security risks — Relative Likelihood: High — Expected Impact if Realized: High - Policy responses: - Diversify the structure of the economy and export sources. - Strengthen regional security surveillance programs. - Cyber-attacks on critical infrastructure — Relative Likelihood: Medium — Expected Impact if Realized: Medium - Policy responses: - Ensure financial service providers frequently upgrade their IT systems. ### Alternative scenario (adverse COVID-19) - Baseline vs adverse scenario assumptions: - Baseline: worst concentrated in 2020H1; economic impact begins to fade in second half of 2020; return to pre-pandemic growth rate in 2023; baseline projections for 2020 revised downwards by about 8 percentage points from the pre-pandemic forecast of 8 percent y/y. - Adverse scenario: deeper and more prolonged COVID-19 shock continuing in 2020H2 and only starting to fade from Q1 2021; growth in 2020 simulated using the IMF Fiscal Affairs Department (FAD)’s COVID-19 Fiscal Stress Test (FST) module; recovery reaches pre-pandemic levels only in 2024. - Modeling approach: - The FST module allows different growth rate assumptions in each sector of the economy, depending on the degree of stringency and length of containment measures in the country. *Source: Excerpted from the IMF chapter "1. Ceiling on the debt-creating overall balance, including grants" (Rwanda program tables and annexes).* ### 3. Under the adverse ### 3. Under the adverse scenario ### Economic impact: output and sectoral effects - Scenario assumptions: - A new lockdown lasting another 6 weeks on top of the previous 6-week one in Q2 2020, bringing the cumulative duration of stringent measures in 2020 to 3 months. - High stringency due to (i) new and rising infections and spread in the region and neighboring countries and to Rwanda; and (ii) a resurgence of the pandemic at the global level. - Growth projection: - Real GDP is expected to contract by 2.6 percent y/y in 2020 relative to the baseline of -0.2 percent. - Sectoral impact: - Disruption is broad based but more pronounced in the services sector due to weaker prospects for a full rebound in commercial travels, tourism and related activities including the meetings, incentives, conferences and exhibitions (MICE) industry; and other sectors involving face-to-face communication. - Operating capacity calibration (sector-level categories preserved as in source): - Marginally Affected (> 90% Operating Capacity) - Moderate Decline (70% - 90% Operating Capacity) - Large Decline (50% - 70% Operating Capacity) - Severe Decline (< 50% Operating Capacity) - Sectors listed under Agriculture, Industry, Services, Public Sector as in source (Human Health & Social Work Activities; Export Crops, Fishing & Fish Processing; Education, Social & Personal Services; Hotels & Restaurants; Information & Communication; Financial Intermediation; Real Estate & Business Services; Domestic Services; Public Admin/Defense; Wholesale & Retail Trade; Transport; Mining & Quarrying; Agriculture & Forestry; Electricity & Water; Construction; Manufacturing). ### Fiscal implications and debt dynamics - Near-term fiscal effects: - Headline and program fiscal deficits would increase and any post-COVID consolidation would be delayed. - Tax revenues would be hit harder under the adverse scenario through lower domestic activity and trade flows. - Expenditures are assumed to remain the same under the baseline; in the absence of policy measures, the shock will be accommodated by higher headline deficits well above the baseline through the medium term. - The deficit will be financed through additional domestic borrowing. - Debt implications: - The public debt-to-GDP ratio will deteriorate, rising above 75 percent in 2021. - To ensure debt remains sustainable at moderate risk of debt distress as in the baseline, a growth-friendly fiscal consolidation will need to start with a delay but be deeper and longer than under the baseline. - Under this scenario the PV of public debt-to-GDP ratio would only reach the EAC’s debt anchor of NPV 50 percent only by 2030 and the debt-to-GDP ratio converging to the medium-term fiscal anchor by 2032, four years later than under the baseline. ### External balances and reserves - External position: - External balances would deteriorate further under the adverse scenario. - Additional pressure would mostly stem from a slower recovery in exports of goods and services, partly compensated by lower imports due to weaker domestic economic activities. - The resulting higher current account deficit would have to be financed through a drawdown in international reserves. ### Monetary and financial sector policy response - Policy stance: - Monetary and financial sector policies would continue to accommodate the COVID-19 shock. - Amid limited fiscal space, the central bank might be required to increase the size of existing liquidity support measures such as the lending facility to banks. - Should the growth outlook deteriorate further with more subdued demand, BNR would consider an accommodative monetary policy stance consistent with the monetary policy framework. ### Key macroeconomic indicators (Annex III table excerpts: Baseline vs. Adverse) - Nominal GDP: - 2020 Baseline: 9,841 - 2020 Adverse: 9,601 - 2021 Baseline: 10,641 - 2021 Adverse: 10,158 - 2022 Baseline: 11,862 - 2022 Adverse: 11,132 - 2023 Baseline: 13,449 - 2023 Adverse: 12,505 - 2024 Baseline: 15,184 - 2024 Adverse: 14,110 - 2025 Baseline: 17,129 - 2025 Adverse: 15,922 - Nominal GDP (percent change): - 2020 Baseline: 8.1 - 2020 Adverse: 5.5 - 2021 Baseline: 8.1 - 2021 Adverse: 5.8 - 2022 Baseline: 11.5 - 2022 Adverse: 9.6 - 2023 Baseline: 13.4 - 2023 Adverse: 12.3 - 2024 Baseline: 2.9 - 2024 Adverse: 12.8 - 2025 Baseline: 12.8 - 2025 Adverse: 12.8 - Real GDP growth (percent): - 2020 Baseline: -0.2 - 2020 Adverse: -2.6 - 2021 Baseline: 5.7 - 2021 Adverse: 3.4 - 2022 Baseline: 6.8 - 2022 Adverse: 5.0 - 2023 Baseline: 8.0 - 2023 Adverse: 7.0 - 2024 Baseline: 7.5 - 2024 Adverse: 7.5 - 2025 Baseline: 7.5 - 2025 Adverse: 7.5 - Total Revenue & Grants (percent of GDP): - 2020 Baseline: 23.1 - 2020 Adverse: 23.2 - 2021 Baseline: 23.4 - 2021 Adverse: 23.6 - 2022 Baseline: 23.2 - 2022 Adverse: 23.7 - 2023 Baseline: 23.8 - 2023 Adverse: 24.4 - 2024 Baseline: 23.9 - 2024 Adverse: 24.4 - 2025 Baseline: 23.3 - 2025 Adverse: 23.3 - o/w Tax Revenue (percent of GDP): - 2020 Baseline: 15.4 - 2020 Adverse: 15.4 - 2021 Baseline: 15.4 - 2021 Adverse: 15.4 - 2022 Baseline: 15.2 - 2022 Adverse: 15.5 - 2023 Baseline: 15.5 - 2023 Adverse: 15.6 - 2024 Baseline: 15.5 - 2024 Adverse: 15.9 - 2025 Baseline: 15.7 - 2025 Adverse: 16.5 - Total Expenditure (percent of GDP): - 2020 Baseline: 32.9 - 2020 Adverse: 33.7 - 2021 Baseline: 31.3 - 2021 Adverse: 32.8 - 2022 Baseline: 30.2 - 2022 Adverse: 32.2 - 2023 Baseline: 29.6 - 2023 Adverse: 31.8 - 2024 Baseline: 28.3 - 2024 Adverse: 31.1 - 2025 Baseline: 27.0 - 2025 Adverse: 28.9 - Fiscal Balance (percent of GDP): - 2020 Baseline: -9.7 - 2020 Adverse: -10.4 - 2021 Baseline: -7.9 - 2021 Adverse: -9.2 - 2022 Baseline: -7.0 - 2022 Adverse: -8.5 - 2023 Baseline: -5.8 - 2023 Adverse: -7.4 - 2024 Baseline: -4.4 - 2024 Adverse: -6.8 - 2025 Baseline: -3.7 - 2025 Adverse: -5.5 - Gross Public Debt (percent of GDP): - 2020 Baseline: 66.7 - 2020 Adverse: 68.1 - 2021 Baseline: 70.9 - 2021 Adverse: 75.9 - 2022 Baseline: 73.4 - 2022 Adverse: 81.0 - 2023 Baseline: 73.0 - 2023 Adverse: 82.4 - 2024 Baseline: 71.7 - 2024 Adverse: 83.0 - 2025 Baseline: 69.6 - 2025 Adverse: 81.8 - Current Account Balance (percent of GDP): - 2020 Baseline: -12.2 - 2020 Adverse: -13.7 - 2021 Baseline: -12.5 - 2021 Adverse: -16.9 - 2022 Baseline: -11.4 - 2022 Adverse: -14.1 - 2023 Baseline: -9.6 - 2023 Adverse: -11.4 - 2024 Baseline: -8.4 - 2024 Adverse: -10.1 - 2025 Baseline: -8.0 - 2025 Adverse: -8.8 - Net International Reserves (months of imports): - 2020 Baseline: 5.5 - 2020 Adverse: 5.0 - 2021 Baseline: 4.3 - 2021 Adverse: 2.7 - 2022 Baseline: 4.2 - 2022 Adverse: 2.2 - 2023 Baseline: 4.1 - 2023 Adverse: 2.0 - 2024 Baseline: 4.2 - 2024 Adverse: 2.3 - 2025 Baseline: 4.2 - 2025 Adverse: 2.6 - Source for table: IMF staff estimates and projections. ### Recalibrating Rwanda’s post-COVID-19 fiscal path (Annex IV) - Pre-COVID-19 PCI fiscal path: - Guided by the EAMU’s debt convergence criterion of 50 percent of GDP in PV terms, estimated to broadly correspond to a nominal debt to GDP ratio of 60 percent. - Historical average GDP growth of 7.5 percent and expected inflation of 5 percent implied a fiscal deficit ceiling set at 5.5 percent of GDP, which builds 1.2 percent of GDP in annual buffers for “off-budget” debt flows. - The deficit ceiling was set as a 5-year rolling window to allow for short-term countercyclical flexibility. - Reasons for reassessment: - The economic and analytical foundations of the EAMU’s debt ceiling need clarification; 2 out of 5 member states have debt stocks well above the ceiling and Rwanda is expected to breach it in 2021. - Concessionality of Rwanda’s debt has markedly improved, exceeding expectations at the time of PCI approval, calling for reassessment of the equivalence between NPV and nominal debt ratios. - Significant uncertainty around the macroeconomic path post-COVID-19 calls for a temporary suspension of the PCI fiscal rule in favor of a tailored fiscal path. - FAD-based recalibration approach: - Use a pre-determined maximum debt “cliff” and estimate buffer from stochastic debt projections; the debt anchor is set as the difference between the debt cliff and the estimated buffer. - For Rwanda, rely on the DSA PV-of-public-debt ceiling of 70 percent of GDP as the fiscal cliff, which broadly corresponds to a nominal debt ratio of 90 percent given the current grant element. - Stochastic projections suggest a nominal debt anchor of 65 percent of GDP would be appropriate to guard against exceeding the DSA “cliff.” - The 65 percent nominal anchor would likely correspond to a PV of debt of around 45 percent of GDP given current concessionality terms. ### Proposed deficit and debt path (selected figures) - Overall deficit (percent of GDP) trajectory: - 2021: -7.9 - 2022: -7.0 - 2023: -5.8 - 2024: -4.4 - 2025: -3.7 - 2026: -3.7 - 2027: -3.7 - 2028: -3.7 - 2029: -5.3 - Impact of currency depreciation (percent of GDP, cumulative path entries): - 2021: 2.6 - 2022: 2.9 - 2023: 1.8 - 2024: 1.9 - 2025: 1.9 - 2026: 1.8 - 2027: 1.8 - 2028: 1.8 - 2029: 1.7 - Bugesera airport (percent of GDP, off-budget financing): - 2021: 0.0 - 2022: 0.6 - 2023: 1.1 - 2024: 1.0 - 2025: 0.9 - 2026: 0.0 - 2027: 0.0 - 2028: 0.0 - 2029: 0.0 - Public debt (percent of GDP) trajectory: - 2021: 71.1 - 2022: 73.7 - 2023: 73.3 - 2024: 72.0 - 2025: 70.0 - 2026: 68.2 - 2027: 66.5 - 2028: 64.4 - 2029: 64.0 ### Capacity development priorities (Annex V) - Overall objective: - Support implementation of the National Strategy for Transformation while ensuring macro stability. - Key CD priorities and objectives: - Public Financial Management: Improve fiscal transparency, including by expanding the coverage of the public sector under GFS2014, and systematically identify and mitigate fiscal risks, including from COVID-19. - Tax Policy and Revenue Administration: Develop and implement a medium-term revenue strategy informed by the latest 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 to support the move to an interest rate-based monetary framework. - Financial Supervision and Regulation: Build on the financial sector stability review assessment to strengthen risk-based supervision, stress-testing, financial safety net and crisis preparedness and management, and financial market infrastructure. *Source: IMF staff estimates and projections, content unit 1rwaea2021001.* ### 4. Government spending priorities were adjusted to reflect emerging needs from the ### 4. Government spending priorities were adjusted to reflect emerging needs from the pandemic. ### Fiscal response and pandemic-related spending - Total expenditure and net lending for FY19/20 was revised upwards to 34.3 percent of GDP under the second RCF-request in June (RCF-2) to allow the Government to cater for the increasing health and social protection needs associated with the pandemic. - Total spending for health and other related emergencies from the pandemic amounted RWF 109 billion (1.2 percent of GDP). - Health spending: large share allocated to purchases of drugs, medical and personal protection equipment (PPEs), and the construction of quarantine facilities. - Social protection spending: allocated to cash transfers, food distribution, and other programs. - Public funds allocated to improve sanitation and water facilities in low-income neighborhoods. - Additional funds provided to Rwandair, the National Airline Company, to help cope with disruption from the shutdown. ### FY19/20 execution and under-execution effects - Despite pandemic outlays, total expenditure and net lending for FY19/20 was about RWF 206 billion (2.2 of GDP) lower than the estimated amount under RCF-2. - Under-execution affected recurrent, capital, and net lending items, largely attributed to disruptions from the six-week lockdown in March-April. - Recurrent expenditure impacts: postponed new recruitments and promotions; reduced outlays for goods and services (office supplies, consumables, stationery, water and energy); reduced expenditures on official domestic and external travels, including conferences. - Capital spending impacts: delayed implementation of capital projects. - Delayed disbursements under the ERF contributed to lower-than-anticipated spending in FY19/20. - Despite delayed disbursement of some committed budgetary loans amounting to RWF 184.9 billion, the revised FY19/20 budget was fully funded with net external financing of RWF 936 billion. ### Revenue performance and FY19/20 fiscal outcome - Total tax revenue collection: RWF 1,524 billion (16.2 percent of GDP), higher than revised estimated amount of RWF 1,408 billion (about 15 percent of GDP) at RCF-2 but lower than pre-COVID-19 projection of RWF 1,591 billion (16.4 percent of GDP) at the 1st PCI review. - Main reason for improved revenue performance: increase in consumption taxes, notably VAT collection. - Turnover growth observed in July-December 2019 continued into first half of 2020, though at a slower pace. - Overall deficit for FY19/20: RWF 855 billion (9.1 percent of GDP), lower than the RCF-2 figure of RWF 1,172 billion. - Some delayed committed budgetary loans totaled RWF 184.9 billion (see above). ### FY20/21 revenue carry-over and revision - Good revenue performance carried over into FY20/21 due to easing of total lockdown and improved economic activity at end-2020Q2 and continued in Q3. - Revenue target of 14.2 percent of GDP in the approved FY20/21 budget (and RCF-2) revised upwards to 15.5 percent of GDP. - Revision accounts for collection of some consumption taxes from the last few days of FY19/20 in June 2020 that accrued to Rwanda Revenue Authority (RRA) at the start of FY20/21 in July, and “one-off” VAT collection in August and September 2020, including import taxes. - New tax revenue projections for FY20/21: RWF 1,591 billion (15.5 percent of GDP), higher than RCF-2 by RWF 131 billion but still below pre-COVID-19 estimates at the 1st PCI review by RWF 237 billion. ### Inflation and monetary policy - Headline inflation in 2020H1: 8.5 percent on average, up from 0.7 percent in 2019H1 and 4.2 percent in 2019H2. - Inflation drivers: increases in core inflation (upward revision of public transport fares, surge in prices of imported vehicles, increase in international prices of imported foodstuffs); food inflation due to decreased supply following poor Season A agricultural performance; energy inflation from electricity tariff revision and higher charcoal and firewood prices. - Monetary Policy Committee (MPC) actions: kept monetary policy accommodative; cut the central bank rate by 50 basis points on April 29, 2020; maintained the central bank rate at 4.5 percent in August. - MPC rationale: projected drop in inflation going forward owing to downward pressures from subdued domestic and foreign demand. ### Central Bank (BNR) liquidity and regulatory measures - Reduction of reserve requirement ratio from 5 percent to 4 percent resulted in RWF 23.4 billion injected into the banking system on April 1st, 2020. - Extended Lending Facility for Banks (ELFB) worth RWF 50 billion established in April 2020 to support banks facing liquidity shortfalls; initially for April-October 2020, later extended. - BNR offered discretionary bond buybacks at prevailing market rate and reduced waiting period for failed secondary market bond sales from 30 days to 15 days. - Guidance issued to banks and microfinance institutions (MFIs) on treatment of relief measures and restructuring of performing loans with borrower capacity assessment, governance, classification, and provisioning clarifications. - BNR required banks and insurers to suspend dividend distribution for 2019 payable in 2020 to conserve capital and liquidity. ### Financial sector resilience and asset quality - Banking sector total Capital Adequacy Ratio (CAR) as at end-June 2020: 23.7 percent (prudential minimum 15 percent). - Core capital ratio as at end-June 2020: 22.3 percent (prudential minimum 10 percent). - Aggregate Liquidity Coverage Ratio (LCR) at end-June 2020: 253 percent. - Banking sector Non-Performing Loans (NPLs) ratio: 5.5 percent in June 2020, up from 4.9 percent in December 2019. - Microfinance institutions (MFIs): average CAR at 34.5 percent (prudential requirement 15 percent); liquidity ratio at 110 percent (prudential requirement 100 percent); NPLs ratio rose from 8 percent in March 2020 to 12.8 percent in June. - Insurance sector: aggregate solvency ratio of private insurers at 156 percent in June 2020 (prudential minimum 100 percent). - Loan restructuring and relief: banks had restructured 39 percent of their loan portfolio (RWF 978 billion) as of end-June 2020; MFIs eased repayment of RWF 41.6 billion (23 percent of their loan portfolio) for borrowers affected by COVID-19. ### External sector, trade, and reserves - Trade deficit widened to 19.5 percent of GDP in the first half of 2020. - Exports of goods and services fell to 12.1 percent of GDP from 19.5 percent of GDP at same period last year. - Exports receipts from travel and tourism shrank by nearly 60 percent y.o.y. in the first half of 2020. - Merchandise exports dropped by 32.4 percent in 2020H1. - Merchandise imports dropped by 6.9 percent in 2020H1, driven by lower demand for capital and intermediate goods and reduced fuel demand. - Exports in July-September decreased by 13.4 percent y.o.y., an improvement from a decline of 49 percent in April-June. - Non-traditional exports in July-September increased by 31.9 percent y.o.y., versus a 62.5 percent decrease in the previous quarter. - Current account deficit (CAD) widened to 14 percent of GDP in 2020H1. - Balance of payments surplus in first half of the year: US$ 222.1 million. - Gross international reserves at end-September: US$ 1,782.7 million, covering 5.9 months of prospective imports of goods and services. - Note: Merchandise exports and imports exclude gold; in 2020H1 imports and exports of gold co-moved, recording a net deficit of $20 million. ### Program performance: quantitative targets and reform targets - All end-June quantitative targets (QTs), except the ceiling on the debt-creating overall balance, were met. - Debt-creating deficit was RWF 729 billion compared to the end-June adjusted target of RWF 697 billion. - Reform targets (RTs): two out of four RTs met. - Comprehensive fiscal risk statement (FRS) published by June 2020 (RT met). - Diagnostic study on optimal Rwanda Social Security Board (RSSB) asset allocation not met due to statutory, managerial, and strategic changes granting RSSB significant autonomy; RSSB intends to hire a permanent asset manager or include asset allocation review as part of wider ongoing assessments. - Publication of MPC macroeconomic projections: progress made; reports after MPC meetings in April and August 2020 include projected path of inflation, output, exchange rate, and the policy rate; ongoing IMF FPAS technical assistance to test and improve projection tools. - Platform for issuing government securities via mobile phones (E-Sub) delayed due to dependency on Rwanda Integrated Payment and Processing System (RIPPS) upgrade; RIPPS upgrade expected to be completed by end-year and E-Sub operational before June 2021. ### Outlook, scenarios, and fiscal policy for FY20/21 - 2020 GDP growth projection revised to -0.2 percent from the 2.0 percent expansion projected in April. - Growth projections: 5.7 percent for 2021 and 6.8 percent for 2022. - Growth returns to pre-pandemic level of 8.0 percent only by 2023. - Current account deficit projected to range between 12.0−12.6 percent of GDP in the medium-term. - Inflation pressures expected to be muted over the medium term and inflation is expected to evolve around the benchmark, though risks from food prices and supply chain disruptions remain. - Alternative adverse scenario: deeper contraction, more protracted recovery, wider current account deficits, lower coverage of reserves in months of imports, lower domestic revenue collection, and higher fiscal deficit. Assumptions include unchanged total spending during recovery period; plan to mobilize additional external financing and rely on strong cash management practices in the near term; adopt a more backloaded and prolonged fiscal consolidation over the medium term to preserve debt sustainability. - FY20/21 COVID-19 spending needs under ERP and ERF: RWF 294 billion (2.9 percent of GDP), including RWF 183 billion (1.8 percent of GDP) for the ERF to support businesses. - This represents an increase in COVID-19-related spending of about RWF 140 billion (1.4 percent of GDP) relative to RCF-2; RCF-2 accommodated an increase in the ERF original endowment of RWF 101 billion and carried over undisbursed ERF funds from the previous fiscal year. - Grants projections revised upwards relative to RCF-2 reflecting re-allocation of half of the World Bank’s commitments from loans to grants starting this FY due to change in debt risk rating from low to moderate. - Fiscal deficit for FY20/21 estimated at RWF 875 billion (8.5 percent of GDP), lower than the RCF-2 estimate of RWF 972 billion (9.5 percent of GDP). *IMF staff summary based on 1rwaea2021001 - 4. Government spending priorities were adjusted to reflect emerging needs from the* ### 21. We have been working diligently to implement our ERF. The ERF was launched in June ### 1rwaea2021001 - 21. We have been working diligently to implement our ERF. The ERF was launched in June ### ERF implementation and uptake - ERF launched in June 2020 with an original RWF 101 billion allocation from the RCF-2 financing. - As of end-October 2020, 51 percent of the funds allocated to support businesses has been disbursed. - Uptake of the working capital window has been only 10 percent of the original allocated amount (RWF 50 billion). - Main constraints to working capital uptake: - Requirement to demonstrate a decline in sales of at least 50 percent from the impact of COVID-19. - Banks’ low appetite to lend to this segment due to low repayment capacity of some businesses. - Banks’ preference for loan refinancing rather than supplying working capital. - Policy adjustment: reduced the required minimum drop in sales to 30 percent, yielding some positive results. - Ongoing approach: continue to assess eligible businesses’ needs and adjust ERF support and access accordingly. ### Public financial management (PFM) structures and cash management - Two committees manage Treasury cash flow and outflows: - Debt Management Committee: reviews and monitors liquidity position and funding requirements; advises the Minister on financing options and issuance of short- and long-term public debt instruments. - Treasury Management Committee: oversees in-year budget execution, Government cash flow planning and expenditures; approves and reviews consolidated revenue and expenditure plans and loan plans submitted by the Debt Management Committee. - Quarterly meetings between BNR and MINECOFIN ensure coordination between fiscal and monetary policies. - Commitment: monitor accrual of resources to the Treasury and protect priority spending identified under the ERP, including social protection, and raise other financing if necessary. ### Fiscal rule suspension and medium-term fiscal anchor - Suspension: the previous PCI fiscal rule (deficit ceiling of 5.5 percent of GDP over a 5-year window) suspended to fit the post-COVID-19 environment. - Rationale: previous rule implicitly assumed stability of macroeconomic assumptions; not appropriate during COVID-19 uncertainty. - Temporary framework: tailored fiscal path agreed with IMF staff to allow additional near-term fiscal room for COVID-19 response and ERP implementation. - Fiscal deficit outcome projection: tailored stance will allow increases in revenue and grants to be partially saved, leading to a 2 percentage-point-of-GDP decline in the overall fiscal deficit from FY20/21 to FY22/23. - Medium-term debt anchor recalibrated in collaboration with IMF staff: - Current estimate: a nominal debt stock of 65 percent of GDP as appropriate medium-term anchor. - This would likely correspond to a PV of debt of around 45 percent of GDP given current concessionality terms. ### Fiscal consolidation strategy and timing - Commitment: restore fiscal sustainability as recovery takes hold. - Objective: design and implement a gradual and growth-friendly fiscal consolidation strategy to support debt convergence to the medium-term debt anchor by 2028. - Timing: fiscal consolidation strategy to begin in 2023, when pandemic impact is expected to fully abate; measures to be discussed at the next program review. - Guiding principles: - Spending rationalization: - Assess scope for streamlining and rationalizing current spending. - Strengthen prioritization and efficiency of public investment. - Focus on reducing current expenditures as a share of GDP over the medium term. - Requested World Bank Public Expenditure Review and planned joint IMF-World Bank PIMA, both expected in 2021. - Revenue mobilization: - Guided by forthcoming Medium-Term Revenue Strategy (MTRS) — see paragraph 27. - Identify tax policy and administrative measures to safeguard tax revenue at around 15.5 percent of GDP until FY22/23 and boost revenue thereafter. - Commitment to withdraw remaining COVID-19-related tax relief measures as soon as the crisis abates. ### Revenue administration, temporary tax relief, and administrative priorities - Temporary tax relief measures enacted early in the pandemic: - Suspension of tax audits. - Extension of deadlines for filing and paying corporate income tax (CIT). - Waiver for PAYE taxes for the hospitality sector and private schools. - VAT exemption for face masks and other essential medical equipment. - Evidence of acceptance: strong compliance with the CIT extended deadline. - Administrative priorities to strengthen taxpayer services and compliance: - Strengthen data analytics capability to identify noncompliance. - Expand the International Taxation Unit to address transfer pricing and base erosion and profit shifting. - Compliance campaigns targeted at specific sectors. - Disseminate more user-friendly software solutions (e.g. EBM V2) to make it simpler and cheaper for taxpayers to comply. - Enhance the Geographical Information System Mapping for rental property taxation. ### Medium-Term Revenue Strategy (MTRS) - MTRS status: currently under preparation with IMF TA and other development partners; expected to be adopted by June 2021. - Scope: set of tax policy and tax administration measures implemented through a sustained process of tax reforms over the next 3 years to boost tax revenue collection and support medium-term development priorities and fiscal consolidation. - Approach: inclusive MTRS exercise involving public institutions, Parliament, and civil society. - Capacity building: exploring ways to strengthen tax policy capacity at MINECOFIN to support MTRS implementation. ### Fiscal risk management and SOEs - Fiscal Risk Committee (FRC) established to identify risks to the national budget and advise on mitigation. - FRC functions: considers inputs from the Fiscal Risk Technical Working Group (FRTWG), validates draft Fiscal Risk Statement (FRS), submits to MINECOFIN executive management, and advises on mitigation measures. - First FRS prepared using fiscal risk registry and published in June 2020. - Planned actions with IMF TA: - Health-check assessment of fiscal risks from state-owned enterprises (SOEs) using all available data; submit outcome and remedial measures to the FRC by end-May 2021. - Conduct the SOE assessment on a bi-annual basis using latest available data. - Explore stress-testing analysis of SOEs’ financial positions and submit outcomes to the FRC. - Strengthen accounting and reporting of public-private partnerships (PPPs) and include PPP information in the Fiscal Risk Review Report (FRR). - Explore providing a legal mandate to the fiscal risk framework, including as part of the review of the 2013 Law on State Finances and Property (Organic Budget Law). - Clarify legal framework governing SOEs. - Produce FRR with higher frequency and develop/monitor key performance indicators for SOEs. ### Fiscal reporting and transparency improvements - Progress: - Quarterly Budgetary Central Government (BCG) budget execution reports produced during FY19/20 using GFSM 2014. - Plan to expand GFSM 2014 reporting coverage and produce a quarterly budget execution report for the general government (GG) excluding RSSB following GFSM 2014 methodology for the first quarter of FY20/21 to be published by end-December 2020. - Continue annual statistics compilation of non-financial public corporations and compile a financial balance sheet of the non-financial public sector (NFPS) with Fund TA. - Implementation: - Timeline for GFSM 2014 coverage expansion and NFPS financial balance sheet to be discussed at next program review. - Implementing recommendations from the IMF’s Fiscal Transparency Evaluation (FTE) conducted in 2019 and intend to request Fund TA to assess implementation progress. - Plan to publish both original and follow-up FTE TA reports shortly after the second assessment is completed. ### RSSB reforms and reporting - RSSB strategic plan for 2020-25 details reform agenda and IT/system upgrades. - July 2019 upgrade (Power Builder) allowed separation of accounts for various schemes; schemes separated from general ledger to trial balance. - Newly procured robust IT system in development; full rollout expected by July 2021. - Expected benefits of new IT system: - Boost RSSB’s immunity to fraud. - Improve oversight over schemes. - Gains in operational efficiency. - Produce financial and management reports for each RSSB scheme upon full rollout. - Research and data management investments, including creation of a new Research and Modernization Unit. - CBHI “mutuelle de santé” expected to achieve self-sustainability in 2021 due to adoption of new earmarked revenue sources. - Commitment to review RSSB’s asset allocation and submit associated report to RSSB management by June 2021 (see paragraph 14 reference). ### Public and publicly-guaranteed debt management - Debt sustainability analysis (June 2020) shows public and publicly-guaranteed debt remains sustainable despite a change in the risk of debt distress from low to moderate status due to COVID-19. - As of end-June 2020: - Stock of public and publicly-guaranteed debt stood at 63.3 per cent of GDP. - 85 per cent of the debt contracted in foreign currency and at concessional terms. - Priorities going forward: - Recover from COVID-19 while keeping debt at sustainable levels. - Maximize concessional external borrowing where possible. - Plan for repayment of Rwanda’s Eurobond and deepen the domestic market. - Strengthen debt management and transparency by preparing and publishing public debt statistical bulletins on a semi-annual basis. ### Procurement transparency and audits - Commitment to transparent use of public funds, including RCF disbursements. - Procurement transparency through Law Governing Public Procurement and E-procurement system, which provides publicly available information on awarded government contracts (participants, initial bids, winning bid name and price, total contract amount, delivery period). - Office of the Auditor General to audit all government expenditures and procurement tenders for FY19/20, including pandemic-linked expenditures, and publish outcome by May 2021. - Exploring publishing beneficial ownership information for companies awarded COVID-19-related government contracts. ### Monetary policy, financial markets, and exchange rate policy - BNR stance: continue data-dependent monetary policy given COVID-19-related projection uncertainties. - Monetary Policy Committee (MPC) practices: - Forecasting cycle takes between 6 to 7 weeks with two pre-MPC meetings. - Increased data-driven analysis and rotational forecasting team to build internal capacity. - Ongoing capacity building in modeling and forecasting, market surveys, information gathering, and data-driven analysis. - Financial market deepening measures: - Continue to deepen money and government bond markets. - Establishment of the Financial Markets Operations Committee improved daily liquidity forecast and timely interventions. - Enhanced capacity of bank Treasurers via ACI program with 32 ACI-certified Treasurers and dealers. - June 2020: BNR eased conditions to access standing facilities. - Planned rollout: true repo program and Global Master Repurchase Agreement expected in June 2021 to develop the interbank market. - Planned buy-back mechanism for government securities to inject long-term liquidity and impact long-term yields, strengthening the monetary policy transmission mechanism (MPTM). - Launch of the E-Sub platform to enable trading of securities among retailers through mobile wallet. - Exchange rate policy: - Commitment to allow exchange rate flexibility; BNR will only intervene to minimize excessive volatility. - FX market pressures after lockdown: - Export-import coverage reduced to 31.2 percent by end-September 2020 from 38.7 percent before the lockdown. - RWF depreciation against the USD rose to 4.4 percent in the first ten months of 2020, from 3.9 percent in the corresponding period of last year, mostly reflecting pressure in the last four months. - Pressures on the FX market expected to continue up to December 2020. - Other external FX sources also decelerated: FDI, tourism, remittances, and transfers from NGOs and international organizations. *Source: 1rwaea2021001 - 21.* ### 38. We continue to strengthen the legal and regulatory framework governing the financial ### We continue to strengthen the legal and regulatory framework governing the financial sector. ### Legal and regulatory enhancements by BNR - BNR actions during the first half of 2020: - Put in place regulations governing mortgage refinancing companies. - Introduced administrative sanctions for non-compliance with AML/CFT requirements. - Implemented changes in the shareholding, amalgamation and transfer of portfolio of insurers and re-insurers. - Issued directives determining the characteristics of an independent director of a financial institution, on underwriting requirements of large risks (insurance), on the ELFB, and on the ERF. - Provided guidance to banks on the treatment of IFRS9 provisions, capital requirement and relief measures due to COVID-19 pandemic, as well as on loan restructuring for MFIs. - Planned near-term regulatory actions (next 6 months): - Issue regulation on consolidated supervision for insurance (group wide supervision). - Issue regulation on proportionality for banks. - Issue regulation for financial holding companies. - Issue regulation on accreditation of actuaries. - Review regulation on licensing of pension schemes and service providers. - Review regulation governing e-money issuers. - Review regulation governing the organization of microfinance activities. - Legislative progress: - Discussions of the Insurance Law are underway in Parliament; it is expected that the Law will soon be passed and gazetted for implementation. ### Financial Sector Stability Review (FSSR) follow-up and IMF TA program - BNR plans a three-year TA program with the IMF to address findings of the FSSR mission (January 2020). - Planned TA focus areas: - Bank regulation and supervision: - Strengthen supervisory capacity for risk-based supervision (RBS) implementation. - Establish an effective supervisory framework for financial/mixed conglomerates to enable compliance with the four Basel Core Principles (BCPs) relevant to consolidated supervision. - Develop capacity for Internal Capital Adequacy and Assessment Process (ICAAP) review and validation, operational risk (operational resilience and cybersecurity), model validation and stress testing. - Financial sector analysis and stress testing framework: - Develop/strengthen stress testing capability. - Move from a backward-looking to a more forward-looking assessment of financial sector resiliency. - Financial market infrastructure (FMIs): - Develop supervisory and oversight framework for FMIs and train staff on oversight implementation. - Financial safety net, crisis preparedness and management: - Develop and strengthen the special resolution regime and crisis preparedness. - Close gaps identified in the FSSR, including enhancing the legal framework for resolution and conducting simulation exercises to test operational readiness of crisis management plans. ### Monitoring credit, liquidity and operational risks amid COVID-19 - Supervisory monitoring and oversight actions: - Strengthen oversight on monitoring and assessment of performance of restructured loans in banks and MFIs through prudential returns and remote use of the supervision tool (EDWH) to ensure proper regulatory classification and provisioning. - Issue guidance on operational resilience and ensure effective implementation to minimize pandemic-related operational disruptions. - Supervisory tools and capital measures: - Considering a set of supervisory tools to address vulnerabilities caused by COVID-19. - Prepared to allow banks to use their capital conservation buffers to absorb losses on a case-by-case basis. - Decision taken in 2020 to suspend dividend distribution in banks and insurance companies could be maintained next year, depending on financial sector performance. - May require a capital restoration plan for severely undercapitalized banks and monitor its execution. ### Financial inclusion and move toward a cashless economy - Financial inclusion progress and digital payments: - 2020 FinScope survey: 77 percent of the population formally included compared to 68 percent in 2016. - Digital payment transactions increased 4 times compared to the pre-COVID-19 period. - Ratio of the value of electronic retail transactions to GDP increased to 54 percent in Q2 2020 compared to the target of 45 percent the same year. - Government priorities to accelerate cashless economy: - Establish an interoperable system for retail payments. - Digitalization of Umurenge Savings and Credit Co-operatives (U-SACCOs). - Work with Payment Service Providers to expand merchants’ footprint through low-cost point of sales and aggressive awareness campaigns. - Continue addressing challenges and risks to financial stability, consumer protection, privacy, cybersecurity, and operational resilience through regulatory and supervisory tools. - Developed a National Financial Inclusion Strategy (yet to be approved) defining key areas and strategies to increase usage of financial products and services. ### Program monitoring: quantitative and reform targets (selected figures and parameters) - Monitoring instruments: quantitative targets (QTs), continuous targets (CTs) and reform targets (RTs); definitions in the Technical Memorandum of Understanding. - Selected half-yearly quantitative targets (Billions of Rwandan francs, unless otherwise indicated): - Ceiling on the debt-creating overall balance, including grants: -472-884 - Floor on stock of Net Foreign Assets: 649746 - Ceiling on flow of net accumulation of domestic arrears: 00 - Continuous targets: - Ceiling on stock of external payment arrears (US$ million): 00 - Ceiling on present value (PV) of new public and publicly guaranteed external debt (US$ million): 821485 - Monetary Policy Consultation Band and inflation parameters: - CPI Inflation target: 5.05.0 - Inflation, upper inner-bound, percent: 8.08.0 - Inflation, lower inner-bound, percent: 2.0 2.0 - Inflation, upper bound, percent: 9.09.0 - Inflation, lower bound, percent: 1.01.0 - Memorandum items (selected): - Total priority spending: 2 450520 - Floor on domestic revenue collection: 2,5 7941,687 - Stock of new external debt contracted or guaranteed by nonfinancial public enterprises (US$ million): 700700 - Total budget support (US$ million): 2 574777 - Budget support grants (US$ million): 230 308 - Budget support loans (US$ million): 344469 - RWF/US$ program exchange rate: 937937 - Reform targets (selected monetary and financial actions with target dates): - Expand industrial and market expectation surveys; begin collecting data to construct a purchasing manager's index; accelerate publication of foreign private capital survey — end-Dec. 2020 — On track. - Update regulatory framework on true repo to rollout Global Master Repurchase Agreement (GMRA) — end-Jun. 2021 — On track. - Introduce a platform for issuing government securities using mobile phones — end-Jun. 2021 — Reset from end-Jun. 2020. - Produce a study on consumer payment behavior analyzing micro-level data on consumer payment choices — end-Dec. 2021 — Reset from end-Dec. 2020. ### External borrowing program (selected figures) - Summary by sources of debt financing (Millions of USD): - Program total Nominal: 1,374 PV: 821 Program (July-December 2020) Nominal: 886 PV: 485 - Concessional debt: 1,106 Nominal 592 PV; Program segment 814 Nominal 433 PV - Non-concessional debt: 268 Nominal 229 PV; Program segment 72 Nominal 52 PV - Commercial terms: 136 Nominal 136 PV (Program segment shows - and -) - By Creditor Type (Millions of USD): - Multilateral: 1,172 Nominal 667 PV; Program segment 832 Nominal 449 PV - Bilateral - Paris Club: 66 Nominal 18 PV; Program segment 50 Nominal 34 PV - Other: 136 Nominal 136 PV; Program segment - - - Uses of debt financing (Millions of USD): - Infrastructure: 992 Nominal 556 PV; Program segment 509 Nominal 296 PV - Social Spending: 51 Nominal 32 PV; Program segment - - - Budget Financing: 331 Nominal 233 PV; Program segment 377 Nominal 189 PV *Source: Rwandan authorities and IMF staff estimates and projections (content from the program document and Technical Memorandum of Understanding).* ### 9. A ceiling applies to the net accumulation of domestic expenditure arrears of the ### 1rwaea2021001 - 9. A ceiling applies to the net accumulation of domestic expenditure arrears of the ### Ceiling on Net Accumulation of Domestic Expenditure Arrears - A ceiling applies to the net accumulation of domestic expenditure arrears of the budgetary central government. - The ceilings for December 31, 2020 and June 30, 2021 are cumulatively measured from June 30, 2020. - Definition: - Domestic expenditure arrears are defined as unpaid claims that are overdue by more than 90 days. - The accumulation of domestic expenditure arrears of more than 90 days is calculated as the 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 in the calculation. - Note: A negative target thus represents a floor on net repayment. ### Ceiling on the Present Value of New External Debt Contracted or Guaranteed by the Government - Definition of debt (per paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements): - “Debt” means a current, (i.e., not contingent) liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments will discharge principal and/or interest liabilities incurred under the contract. - Primary forms of debt: - Loans: advances of money (including deposits, bonds, debentures, commercial loans and buyers’ credits), and temporary exchanges equivalent to fully collateralized loans (such as repurchase agreements and official swap arrangements). - Suppliers’ credits: contracts where the supplier permits the obligor to defer payments until sometime after delivery of goods or services. - Leases: the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding payments that cover operation, repair or maintenance. - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - External debt is defined as debt contracted or serviced in a currency other than the Rwanda Franc. - A continuous ceiling is applied to the present value (PV) of all new external debt (concessional or non-concessional) contracted or guaranteed by the central government, including commitments contracted or guaranteed for which no value has been received. - The ceiling for December 31, 2020 is cumulatively measured from June 30, 2020. - The ceiling for June 30, 2021 is cumulative from January 1, 2021. - This quantitative target does not apply to: - Normal import-related commercial debts having a maturity of less than one year; - Rescheduling agreements; and - IMF disbursements. - Contracting and valuation rules: - A debt is considered contracted when all conditions for its entrance into effect have been met, including approval by the Government of Rwanda. - For program purposes, the value in U.S. dollars of new external debt is calculated using the program exchange rates. - The PV of new external debt is calculated by discounting all future debt service payments (principal and interest) on the basis of a program discount rate of 5 percent and taking account of all loan conditions, including the maturity, grace period, payment schedule, front-end fees and management fees. - The PV is calculated using the IMF model for this type of calculation based on the amount of the loan. - A debt is considered concessional if on the date on which it is contracted the ratio of its present value to its face value is less than 65 percent (equivalent to a grant element of at least 35 percent). - In the case of loans for which the grant element is zero or less than zero, the PV is set at an amount equal to the face value. - Variable-rate debts: - For debts carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. - The program reference rate for the six-month USD LIBOR is 0.46 percent and will remain fixed for the duration of the program. - The spread of six-month Euro LIBOR over six-month USD LIBOR is -100 basis points. - The spread of six-month JPY LIBOR over six-month USD LIBOR is -50 basis points. - The spread of six-month GBP LIBOR over six-month USD LIBOR is -50 basis points. - For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD LIBOR is -50 basis points. - Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added. - These rates will remain fixed and will not be revised until every Fall edition of the World Economic Outlook (WEO). - Adjustor: - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling, in case deviations from the performance criterion on the PV of new external debt are prompted by a change in the financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees) of a debt or debts. - The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed. - Reporting requirement: - The authorities will inform IMF staff of any planned external borrowing and the conditions on such borrowing before the loans are either contracted or guaranteed by the government. ### Monetary Policy Consultation Clause (MPCC) - Definition: - MPCC headline inflation is defined as 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 of Rwanda (NISR). - Consultation triggers: - If the observed headline inflation falls outside the ±3 percentage point range around the mid-point of target band value for end-December 2020 and end-June 2021, the authorities will conduct discussions with the Fund staff. - If the observed headline inflation falls outside the ±4 percentage point range around 5 percent for end-December 2020 and end-June 2021 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; and - (iii) proposed remedial actions if deemed necessary. ### Memorandum Items and Data Reporting Requirements - Submission timelines: - 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. - Priority expenditure: - Data on priority expenditure will be transmitted on a quarterly basis. - Priority expenditure is defined as the sum of those recurrent expenditures, domestically-financed capital expenditures, and policy lending that the government has identified as priority in line with the NTS. - Priority expenditure is monitored through the Integrated Financial Management System (IFMS) which tracks priority spending of the annual budget at the program level at the end of each quarter. - Domestic revenue: - Detailed data on domestic revenues will be transmitted on a monthly basis. - Domestic revenue is defined according to GFSM 2014 taxes and other revenues, per the budgetary central government statement of operations table, but including: - (a) local government taxes (comprised of business licenses, property tax, and rental income tax); and - (b) local government fees; - and excluding receipts from Peace Keeping Operations. - New non-concessional external borrowing: - Data on the contracting and guaranteeing of new non-concessional external borrowing with non-residents will be transmitted on test dates. - The data excludes external borrowing by two state-owned banks, the Bank of Kigali and Rwanda Development Bank (RDB), which are assumed not to seek or be granted a government guarantee. - The data also apply to private debt for which official guarantees have been extended, including future swaps involving foreign currency loans guaranteed by the public sector, and which, therefore, constitute a contingent liability of the public sector. - The data will exclude external borrowing which is for the sole purpose of refinancing existing public-sector debt and which helps to improve the profile of public sector debt. - The data will also exclude on-lending agreement between Government of Rwanda and public-sector enterprises. - Policy changes: - The authorities will inform the 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). - The authorities will inform the IMF staff of changes affecting respect of continuous QTs. - The authorities will furnish a description of program performance according to QTs as well as reform targets within 8 weeks of a test date. - The authorities engage to submit information to IMF staff with the frequency and submission time lag indicated in Table 1 of the TMU. The information should be mailed electronically to the Fund (email to the Resident Representative and the Mission Chief). ### Debt Sustainability Analysis (DSA) — Key Findings and Background - Risk ratings: - Risk of external debt distress: Moder ate - Overall risk of debt distress: Moder ate - Granularity in the risk rating: Limited s pace to absor b s hocks - Application of judgment: No - Main findings: - The present Bank/Fund assessment indicates a moderate risk of external and overall public debt distress. - Current debt-carrying capacity is consistent with a classification of ‘ str ong ’. - The baseline macroeconomic scenario reflects the negative effect of the COVID-19 pandemic on growth, exports, and revenues, which sharply raises external and domestic financing needs in 2020. - The adverse economic impact of the pandemic, coupled with higher loans, though mostly concessional from multilateral and bilateral partners, is expected to entail a higher pace of accumulation of public and publicly-guaranteed debt. - Stress tests highlight that Rwanda is more susceptible to external shocks compared to the pre-pandemic period even after the initial impact of the COVID-19 dissipates. - Policy recommendations: - Authorities are encouraged to further enhance their debt management capacity to mitigate heightened risks in the context of the COVID-19 crisis. - Adopt a credible fiscal consolidation path to facilitate a return to the pre-pandemic debt trajectory. - Strengthen the oversight and management of state-owned enterprises (SOEs) and public-private partnerships (PPPs) to reduce fiscal risks. - A fiscal consolidation following the temporary and necessary pandemic support, together with the improved concessionality of debt, is expected to bring the PV of public debt-to-GDP ratio down to below the EAC’s fiscal anchor of 50 percent in 2025. - Key metrics and historical developments: - Rwanda’s public and publicly-guaranteed (PPG) external debt-to-GDP ratio has increased by 24 percentage po in ts of GD P in the past 6 years to meet development needs envisaged in the National Strategy for Transformation (NST). - External PPG debt has risen from 21.1 percent of GDP in 2013 to 45.4 percent in 2019. - Present value (PV) of external PPG debt-to-GDP ratio: 29. 3 p er ce nt in 2019. - Total PPG debt: 58.1 percent of GDP in 2019. - Total PPG debt in 2019 was higher than the 2019 DSA projections (estimated at 55. 8 percent of GDP) due to higher fiscal deficit than projected at the time of the previous full DSA. - About two-thirds of external debt remains concessional. - The yield on the outstanding Eurobond has increased to around 5.6 p er ce nt. - Rates on domestic T-bills and T-bonds range from 5.5 percent (28 days) to 12.7 percent (15 years). - Rwanda’s Composite Indicator is 3.16, which remains above the upper threshold value of 3.05. - Coverage and assumptions: - The DSA covers the central government, guarantees, and state-owned enterprises. - Ministry of Finance and Economic Planning publishes annual debt data covering domestic and external debt of the central government, broken down by multilateral, bilateral and commercial debt, and information on both domestic and external guarantees and external debt held by all SOEs. - There is no debt stemming from extra budgetary funds, long term central bank financing of the government, nor the state-owned social security fund. - Local government debt is not covered but the existing stock to date is marginal and its contracting is subject to approval by the Ministry of Finance and Economic Planning. - The contingent liabilities shock accounts for the realization of liabilities from corporations where the government has a minority stake (i.e., 2 percent of GDP) and the possible incidence of a financial crisis. - Tailored stress-test parameters and coverage: - The country’s coverage of public debt includes the Central Government plus Social Security and Extra Budgetary Funds, Central Bank, Government-Guaranteed Debt, Non-Guaranteed SOE Debt. - Other elements and shock parameters used in the tailored stress test: - Other elements of the general government not captured in main coverage: 0.0 percent of GDP. - SOE's debt (guaranteed and not guaranteed by the Government) default shock: 2 percent of GDP. - PPP contingent liability shock: 35 percent of PPP stock (Rwanda’s PPP stock is shown as ...). - Financial market shock (default value is the minimum of 5 percent of GDP): 5 percent of GDP. - Total (2+3+4+5) (in Percent of GDP): 7.0 *Source: IMF staff and associated Joint Bank-Fund documents.* ### 2.6 percent o f GD P. ### 2.6 percent o f GD P. ### Overview and key message - The document references "2.6 percent o f GD P." as a headline figure. - Source: Rwandan authorities and World Bank’s Private Participation in Infrastructure Database. ### Subsector coverage (public sector check boxes) - 1 Central Government: X - 2 State and Local Government: - 3 Other Elements in the General Government 1/: X - 4 o/ w: Social Security Fund: X - 5 o/ w: Extra Budgetary Funds (EBFs): X - 6 Guarantees (to Other Entities in the Public and Private Sector, Including to SOEs): X - 7 Central Bank (Borrowed on Behalf of the Government) 2/: X - 8 Non-Guaranteed SOE Debt: X ### Underlying assumptions and baseline - Macroeconomic assumptions reflect recent developments and policies, including impact of the COVID-19 pandemic and are consistent with the staff report for the third PCI review. - Major differences from the 2019 DSA: - higher-than-projected 2019 GDP growth and FY2018/19 fiscal deficit, followed by medium-term fiscal consolidation agreed with the authorities for the third review of the PCI; - significant downward revisions in 2020 growth, current account and fiscal balances due to the COVID-19 pandemic; - scaling up of the Bugesera international airport project. - Compared to the second RCF request, the fiscal deterioration for FY2019/20 was lower than projected because revenue outturn surprised on the upside, helped by sustained tax collections and a rebound on VAT revenues. - The fiscal stance under the DSA accommodates a temporary deviation from the PCI-supported operational deficit ceiling of 5.5 percent of GDP due to the impact of COVID-19. - Fiscal path accommodates a temporary increase in the fiscal deficit, followed by gradual consolidation to bring total PPG debt back to the 65 percent o f GDP in 2028, as described in staff report for the third review of the PCI. - Gross financing needs of the public sector have increased over the medium-term compared to the previous DSA, with the assumption that the majority of additional financing would be accessed on concessional terms and used for investment spending. ### COVID-19 shock assumptions and responses - The DSA incorporates expected impact of COVID-19, including: - real GDP growth revised down by 8 percentage points relative to the pre-pandemic projection in 2020; - exports of goods and services: 20 percent decline in 2020; - tax revenues: 13 percent decline in 2020; - fiscal deficit: revised up by about 4 percentage points of GDP in 2020. - Recovery assumptions: - economic recovery from the end of 2021, with GDP growth gradually reverting to pre-pandemic trend in the medium term. - Financing supports assumed to fill external financing gap: - Rapid Credit Facility (RCF); - debt service relief under IMF’s Catastrophe Containment and Relief Trust (CCRT); - World Bank financial support; - prospective concessional financing from other development partners. - The DSA baseline does not include any debt service suspension from official bilateral creditors under the Debt Service Suspension Initiative, as the authorities are still considering participation. ### Bugesera international airport scaling-up - Total cost projected to increase from US$1.3 billion at time of RCF request to US$1.5 billion under planned scaling up. - Financing assumption (per agreements signed between government and Qatar Airways in December 2019): - government will take on 40 percent of total cost as guaranteed debt on commercial terms; - Qatar Airlines will take on 60 percent as foreign direct investment (FDI). - Growth impact: - growth expected to increase at start of project reflecting additional investment and then decline as project phases down, subject to possible delays due to COVID-19 pandemic. - Bugesera growth impact calculated by applying a fiscal multiplier of 0.3 to US$1.5 billion over 2021–25, with a persistence parameter of 0.6. ### Financing mix, concessionality, and public debt dynamics - DSA assumes continued support from bilateral and multilateral development partners over medium term. - Financing mix assumptions: - over first 5 years, larger financing needs expected to be met by increased support from official bilateral and multilateral partners, improving debt concessionality relative to previous DSA; - from 2025 onwards, financing mix assumed to shift gradually away from external concessional financing to market-based financing and from external to domestic financing, relying progressively more on long-term debt instruments as local bond markets develop. - Grant-equivalent external financing projected to decline: - from 66 percent of total external financing in 2020 to 59 percent in 2030 and 37 percent by 2040. - Average effective real interest rates on domestic debt expected to rise from 2.4 percent in 2010-19 to 4.1 percent in 2031–40. - Public debt increases over past five years driven by higher-than-anticipated primary deficits, faster exchange rate depreciation, and debt contracted or guaranteed outside the budgetary central government, which led to higher-than-expected debt accumulation of 8.9 percentage points of GDP. - DSA considers customized stress scenarios to capture fiscal risks regarding debt accumulation outside the budgetary central government. ### Realism tools, fiscal adjustment, and growth path - Post-pandemic fiscal consolidation: - a 3-year fiscal consolidation in the primary balance is expected to reach up to 3.0 percentage of GDP from 2023 to 2028. - Projected 3-year fiscal adjustment of 3.0 percentage of GDP lies in the top quartile of past adjustments for a sample of LICs. - Projected growth path in 2020 deviates from path derived using a typical multiplier due to large real shock from COVID-19. - Compared to 2019 DSA, current DSA assumes: - higher private investment-to-GDP ratio for 2021−25 due to scaling-up of Bugesera airport project; - lower public investment-to-GDP ratio mainly due to envisaged post-pandemic fiscal consolidation constraining discretionary expenditure including domestic capital investment. ### Debt-carrying capacity and thresholds - Rwanda’s composite index (CI) for debt-carrying capacity stands at 3.16, above cut-off value of 3.05 for strong capacity countries; CI rating: Strong. - CI components (selected): - CPIA contribution: 0.39 coefficient * 4.04 = 1.55 (49% contribution) - Real growth rate contribution: 2.72 coefficient * 6.87 = 0.19 (6% contribution) - Import coverage of reserves contribution: 4.05 coefficient * 39.99 = 1.62 (51% contribution) - Applicable thresholds and benchmarks table provided for external debt burden and total public debt benchmarks. ### Box 1 — Macroeconomic Framework for the DSA (highlights) - Growth: - Post-COVID recovery; scaling-up of Bugesera airport raises near-term growth rate to 6–8 percent around 2022−25, followed by 6–7 percent short-term; long-term growth expected to reach 6.5 percent by 2040. - External sector: - After 20 percent decline due to COVID-19, exports expected to revert to pre-pandemic trend gradually (11 percent on average during 2020–40 vs 13 percent over 2009-19). - Current account deficit expected to reach 6.6 percent by around 2040. - Inflation: - Expected to remain at authorities’ target of 5 percent over medium to long run. - Reserves: - Reserves coverage expected to remain in range of 4–5 months of prospective imports over 2021–25 and in outer years. - Domestic revenue mobilization: - Revenues assumed to recover from 17 percent in 2020 to 24 percent by 2040. - Grants: - Grants decline from 4 percent of GDP in 2019 to 2 percent by 2030, and less than 1 percent by 2040. - Public spending and deficit: - COVID-19 shock widens fiscal deficit by about 4 percentage points of GDP in 2020; fiscal deficit assumed to revert to 5.3 percent of GDP around 2030, stay around 5.3 percent until 2035, then go down and stay around 4.8 percent over the forecast horizon. - External borrowing: - Short- and medium-term tilt toward concessional external financing; from 2028 onward, framework assumes progressively larger share of non-concessional borrowing. - Share of external financing relative to total medium- to long-term financing expected to remain around 80 percent through 2030 before declining to 42 percent by 2040. - Eurobond assumed rolled over in 2023 and 2033 at an interest rate of 8 percent and maturity of 10 years with principal repaid in last year. - Domestic borrowing: - New domestic borrowing expected contracted at average nominal interest rate of 8.7 percent over next five years, rising gradually to 9.5 percent in long run. - Foreign Direct Investment (FDI): - Framework assumes increase in FDI driven by NST, Compact with Africa, and other incentives. *Source: Rwandan authorities and World Bank’s Private Participation in Infrastructure Database.* ### 3.8 percent of GDP in 2019 to 4.5 percent by around 2040. The current DSA assumes higher medium-term FDI due ### RWANDA — DEBT SUSTAINABILITY ANALYSIS ### External debt: vulnerabilities and dynamics - The PV of external debt-to-GDP ratio remains below the indicative threshold under both the baseline scenario and the most extreme shock. - The PV of external debt-to-export ratio temporarily breaches thresholds in 2022 and 2023 under the most extreme shock due to a sharp decline in exports from the COVID-19 shock; this is mitigated by adequate reserves and available external financing. - Rwanda may face liquidity pressures: - A spike in external debt service in 2023 (due to rolling over the 10-year Eurobond issued in 2013) causes a one-off breach to the debt service-to-revenue ratio under the baseline scenario. - Multiple breaches to the debt service-to-revenue ratio occur under an alternative scenario assuming a one-time depreciation. - The gross financing need indicator (market-financing risk) shows breaches, signaling market financing pressures and deteriorating market sentiment. - Higher gross financing needs for 2020-25 compared to the 2019 DSA increase medium-term liquidity risk. ### Customized stress tests and contingent liabilities - Customized scenarios assess fiscal risks from contingent liabilities outside the budgetary central government: - Scenario 1: higher cost of the Bugesera airport project of US$1.8 billion over the same period. - Scenario 2: an unidentified contingent liability with a one-off increase in the debt-to-GDP ratio of 8.9 percentage points in the second year of the projection. - Scenario 3: combination of Scenarios 1 and 2. - All customized stress tests find solvency indicators remain well below thresholds; the debt service-to-revenue ratio shows the same one-period breach in 2023 when the 2013 Eurobond matures. - The single one-year breach is discounted in setting risk ratings in line with the LIC-DSF guidance note, implying Rwanda has some room to absorb contingent liability shocks. ### Historical scenario outcomes - Under the historical scenario (recurrence of several large external shocks and large external imbalances), the PV of external debt-to-GDP and PV of debt-to-export rise sharply. - This outcome is driven primarily by a large current account deficit and negative GDP deflator calibrated using historical averages covering periods with donor withdrawal, commodity price shocks, and drought, and large exchange rate adjustment episodes. ### Public debt: trajectory and benchmarks - The PV of public debt-to-GDP ratio remains below the LIC DSA benchmark of 70 percent. - Public debt follows external debt dynamics; remains below benchmark even under the most extreme shock and customized stress tests. - The PV of public debt-to-revenue ratio and the debt service-to-revenue ratio are expected to decline steadily over the forecast horizon, aligned with an increase in total revenue. - The COVID-19 shock raises the PV of public debt-to-GDP ratio above the EAC’s debt convergence criterion in 2022: - The combination of the COVID-19 shock and higher (mostly concessional) loans leads to a higher pace of PPG debt accumulation, breaching the EAC 50 percent of GDP ceiling in 2022. - Post-pandemic fiscal consolidation under the PCI and higher share of external concessional borrowings are expected to bring the PV of public debt-to-GDP ratio below the EAC’s debt convergence criterion in 2025 and after — 5 years earlier than projected at the time of the second RCF request. ### Assessment of debt sustainability and risk - Overall assessment: debt is sustainable with a moderate risk of external and overall public debt distress. - Risk rating moved from low (2019) to moderate due to the global COVID-19 crisis. - Solvency and liquidity indicators have at most one short-lived breach under the baseline and customized stress tests; multiple breaches occur under the most extreme standardized shocks. - Granular assessment indicates limited space to absorb shocks; some room remains to absorb solvency shocks such as contingent liabilities. - A limit on the stock of new external PPG debt is introduced under the PCI to help preserve debt sustainability. ### Policy recommendations and priorities - Strengthen debt management capacity to mitigate heightened risks in the COVID-19 context: - Reduce rollover risks by holding enough liquidity buffers and smoothing out the debt servicing profile. - Enhance identification, assessment, and management of fiscal risks (a pillar under the PCI). - Adopt credible fiscal consolidation as soon as the COVID-19 crisis abates to return to the pre-pandemic debt trajectory. - Contain contingent liability risks and strengthen oversight and management of SOEs and PPPs; authorities have shown progress with technical support from staff and indicated commitment to required reforms. ### Key numbers and dates (as presented) - 3.8 percent of GDP in 2019 to 4.5 percent by around 2040. - Spike in external debt service in 2023 (Eurobond issued in 2013 matures). - Customized contingent liability: US$1.8 billion (Bugesera airport cost increase). - Unidentified contingent liability shock: one-off increase in debt-to-GDP ratio of 8.9 percentage points in year 2. - LIC DSA public debt benchmark: 70 percent. - EAC debt convergence criterion: 50 percent — breached in 2022, returned to below in 2025 under PCI scenario. - Higher gross financing needs for 2020-25 relative to the 2019 DSA. *Source: Debt Sustainability Analysis for Rwanda (excerpt).* ### 20. The authorities broadly agree with the results of this DSA and the overall conclusion of a ### 20. The authorities broadly agree with the results of this DSA and the overall conclusion of a ### Authorities' views and policy actions - The authorities broadly agree with the results of this DSA and the overall conclusion of a moderate risk of external debt distress. - The authorities continue to place a high priority on debt sustainability and carry out their own analysis on a regular basis. - Debt management strategy: based on maximizing external concessional funding to avoid pressure on its debt repayment profile, while developing their domestic capital market. - The authorities acknowledge that the main risk to debt sustainability continues to be from external shocks. - To reduce rollover risk of the 10-year Eurobond in 2023, the authorities have started discussions about mitigating measures such as pre-financing of debt and buyback of debt falling due. - The authorities plan to compile a financial balance sheet of the non-financial public sector as part of efforts to expand the coverage of GFSM2014 reporting with support from the IMF. ### Main DSA conclusion and qualification - Overall DSA conclusion: moderate risk of external debt distress. - The DSA emphasizes external shocks as the principal risk. - Stress tests and tailored scenarios (e.g., one-time depreciation, exports shock, combined contingent liabilities, market financing) are used to qualify the moderate category across 2020–2030. ### Key statistics and projections (selected, as reported) - External debt (nominal) 1/ (In percent of GDP): 2017 45.8 2018 49.4 2019 53.6 2020 63.8 2021 66.8 2022 69.5 2023 70.2 2024 70.7 2025 70.8 2030 69.9 2040 59.1 32.7 69.5 - of which: public and publicly guaranteed (PPG) (In percent of GDP): 2017 37.4 2018 41.1 2019 45.4 2020 55.6 2021 58.4 2022 60.7 2023 61.0 2024 61.1 2025 60.8 2030 57.3 2040 39.2 27.2 59.3 - Change in external debt (In percent of GDP): 3.3 3.6 4.3 10.2 3.0 2.7 0.6 0.5 0.1 -0.4 -1.0 - Identified net debt-creating flows (In percent of GDP): 4.4 5.0 6.2 9.9 5.5 3.6 1.1 0.2 -0.1 0.2 -1.6 6.0 2.0 - Non-interest current account deficit (In percent of GDP): 8.3 8.9 10.9 10.7 11.1 10.0 8.3 6.8 6.4 6.2 4.5 9.3 7.5 - Deficit in balance of goods and services (In percent of GDP): 12.8 13.7 14.7 16.3 17.1 16.1 14.8 13.4 11.9 9.7 5.4 15.7 12.6 - Exports (In percent of GDP): 20.6 21.2 22.2 18.2 22.7 26.2 26.8 27.7 27.9 30.1 33.8 - Imports (In percent of GDP): 33.4 34.9 36.9 34.4 39.8 42.3 41.7 41.1 39.8 39.8 39.1 - Net current transfers (negative = inflow, In percent of GDP): -6.4 -6.9 -5.8 -7.0 -7.2 -7.2 -7.6 -7.3 -6.1 -4.0 -1.6 -7.7 -5.9 - of which: official (In percent of GDP): -6.5 -6.5 -5.5 -7.0 -6.9 -6.6 -7.0 -6.8 -5.6 -3.1 -1.2 - Net FDI (negative = inflow, In percent of GDP): -2.8 -3.6 -3.8 -2.4 -3.5 -3.5 -3.4 -3.3 -3.3 -3.2 -4.5 -2.7 -3.1 - Endogenous debt dynamics 2/ (In percent of GDP): -1.2 -0.3 -0.9 1.6 -2.1 -2.9 -3.7 -3.2 -3.2 -2.8 -1.5 - Contribution from nominal interest rate (In percent of GDP): 1.2 1.5 1.5 1.5 1.5 1.4 1.3 1.6 1.7 1.8 2.1 - Contribution from real GDP growth (In percent of GDP): -1.6 -3.8 -4.4 0.1 -3.5 -4.3 -5.0 -4.8 -4.8 -4.6 -3.6 - Contribution from price and exchange rate changes (In percent of GDP): -0.8 2.0 2.0 - Residual 3/ (In percent of GDP): -1.0 -1.4 -1.9 0.3 -2.5 -0.9 -0.5 0.3 0.2 -0.6 0.6 -2.2 -0.5 - of which: exceptional financing (In percent of GDP): 0.0 0.0 0.0 -0.2 -0.3 -0.1 0.0 0.0 0.0 0.0 0.0 - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: 29.3 34.1 35.2 36.7 37.5 38.4 39.2 37.1 26.5 - PV of PPG external debt-to-exports ratio: 132.1 187.8 154.7 139.9 139.9 138.9 140.3 123.4 78.5 - PPG debt service-to-exports ratio: 6.8 7.8 7.2 12.1 14.6 7.9 19.1 7.3 6.9 7.0 9.4 - PPG debt service-to-revenue ratio: 7.8 8.7 8.2 12.7 18.6 11.5 28.4 11.0 10.2 10.4 13.4 - Gross external financing need (Billion of U.S. dollars): 0.8 0.8 1.0 1.3 1.3 1.2 1.4 1.0 1.0 1.7 3.6 - Key macro assumptions (selected): - Real GDP growth (in percent): 4.0 8.6 9.4 -0.2 5.7 6.8 8.0 7.5 7.5 7.2 6.5 7.2 6.3 - GDP deflator in US dollar terms (change in percent): 1.9 -4.2 -3.9 2.7 -3.0 -0.6 2.0 1.9 1.9 2.0 2.0 -1.1 1.3 - Effective interest rate (percent) 4/: 3.0 3.3 3.2 2.8 2.3 2.2 2.1 2.5 2.6 2.8 3.7 3.3 2.6 - Growth of exports of G&S (US dollar terms, in percent): 25.5 7.3 10.0 -16.1 28.3 22.3 12.7 13.0 10.5 9.4 9.9 14.9 11.2 - Growth of imports of G&S (US dollar terms, in percent): 1.1 8.9 11.1 -4.4 18.5 12.8 8.4 8.0 6.1 8.3 8.6 9.9 8.5 - Grant element of new public sector borrowing (in percent): 48.3 47.5 42.6 24.3 32.3 30.6 42.0 24.3 40.3 - Government revenues (excluding grants, in percent of GDP): 17.9 19.0 19.5 17.3 17.8 18.0 18.1 18.3 19.0 20.2 23.6 16.4 18.9 - Aid flows (in Billion of US dollars) 5/: 0.4 0.5 0.4 1.3 1.1 1.1 1.1 1.0 0.9 1.1 1.1 - Grant-equivalent financing (in percent of GDP) 6/: 11.7 8.7 8.1 8.2 7.7 6.2 4.3 1.7 6.9 - Grant-equivalent financing (in percent of external financing) 6/: 65.0 71.3 67.4 51.5 63.8 60.1 59.5 37.5 63.4 - Nominal GDP (Billion of US dollars): 9 10 10 10 11 11 12 14 15 23 54 - Nominal dollar GDP growth: 5.9 4.1 5.1 2.5 2.5 6.2 10.1 9.6 9.5 9.3 8.6 6.0 7.7 - Memorandum items: - PV of external debt 7/ (In percent): 37.6 42.3 43.7 45.5 46.7 48.0 49.1 49.7 46.5 - In percent of exports: 169.3 232.8 191.9 173.7 174.1 173.5 176.0 165.2 137.6 - Total external debt service-to-exports ratio: 13.0 15.4 14.5 21.2 21.7 14.2 25.3 13.5 13.3 14.5 20.0 - PV of PPG external debt (in Billion of US dollars): 3.0 3.5 3.7 4.1 4.7 5.2 5.8 8.5 14.2 - (PVt-PVt-1)/GDPt-1 (in percent): 5.7 1.9 3.7 4.7 4.6 4.5 2.9 1.1 - Non-interest current account deficit that stabilizes debt ratio (In percent of GDP): 5.0 5.4 6.6 0.5 8.1 7.3 7.6 6.3 6.2 6.6 5.5 - Public sector debt (In percent of GDP): 2017 48.7 2018 52.4 2019 58.1 2020 65.9 2021 71.1 2022 73.7 2023 73.3 2024 72.0 2025 70.0 2030 63.6 2040 61.4 35.6 68.4 - of which: external debt (In percent of GDP): 37.4 41.1 45.4 55.6 58.4 60.7 61.0 61.1 60.8 57.3 39.2 27.2 59.3 - Change in public sector debt (In percent of GDP): 4.3 3.7 5.7 7.9 5.2 2.6 -0.4 -1.3 -2.1 -0.4 0.0 - Identified debt-creating flows (In percent of GDP): 0.8 2.8 5.5 7.8 5.4 2.9 -0.1 -1.1 -2.0 -0.2 0.0 2.0 0.7 - Primary deficit (In percent of GDP): 3.6 3.5 6.8 3.0 6.0 5.8 5.2 4.0 2.8 4.0 3.0 3.1 4.2 - Revenue and grants (In percent of GDP): 22.6 23.8 23.6 23.1 23.4 23.2 23.8 23.9 23.3 22.4 24.4 23.4 23.1 - of which: grants (In percent of GDP): 4.7 4.8 4.2 5.8 5.6 5.2 5.7 5.6 4.3 2.2 0.8 - Primary (noninterest) expenditure (In percent of GDP): 26.2 27.3 30.5 31.1 29.4 29.0 29.0 27.9 26.1 26.4 27.3 26.5 27.4 - Automatic debt dynamics (In percent of GDP): -2.6 -0.6 -1.4 -0.2 -0.6 -2.9 -5.3 -4.8 -4.6 -4.2 -3.0 - Contribution from interest rate/growth differential (In percent of GDP): -1.6 -2.7 -3.8 -0.3 -3.2 -4.3 -5.3 -4.8 -4.7 -4.2 -3.0 - of which: contribution from average real interest rate (In percent of GDP): 0.1 1.1 0.7 -0.4 0.4 0.3 0.2 0.4 0.4 0.1 0.7 - of which: contribution from real GDP growth (In percent of GDP): -1.7 -3.8 -4.5 0.1 -3.6 -4.6 -5.4 -5.1 -5.0 -4.3 -3.7 - Contribution from real exchange rate depreciation (In percent of GDP): -1.0 2.1 2.5 - Other identified debt-creating flows (In percent of GDP): -0.1 0.0 0.0 0.0 0.0 0.0 0.0 -0.3 -0.2 0.0 0.0 -0.1 -0.1 - Residual (In percent of GDP): 3.4 0.9 0.2 0.2 2.3 1.1 -0.3 -0.2 0.0 -0.1 0.0 2.0 0.2 - Sustainability indicators (public sector): - PV of public debt-to-GDP ratio 2/: 42.8 45.5 48.8 50.6 50.9 50.4 49.3 44.3 44.4 49.4 - PV of public debt-to-revenue and grants ratio: 181.0 196.7 208.8 218.0 213.8 210.5 211.6 208.3 202.9 195.6 194.8 198.1 - Debt service-to-revenue and grants ratio 3/: 26.5 29.3 27.0 37.2 36.3 37.7 49.3 35.9 32.2 30.7 27.1 24.5 23.6 - Gross financing need 4/: 8.4 9.0 13.2 16.6 14.5 14.5 16.9 12.2 10.1 9.2 14.0 - Key fiscal and macro assumptions (selected): - Average nominal interest rate on external debt (percent): 2.0 2.3 2.3 1.9 1.6 1.4 1.3 1.7 1.8 1.8 1.8 1.9 1.7 - Average real interest rate on domestic debt (percent): -1.9 6.9 5.2 -1.9 7.1 4.4 4.0 4.1 4.4 4.2 4.2 2.4 4.0 - Inflation rate (GDP deflator, in percent): 7.6 -0.8 0.4 8.3 2.3 4.3 5.0 5.0 5.0 5.0 5.0 3.5 5.0 - Growth of real primary spending (deflated by GDP deflator, in percent): 7.1 13.2 22.2 1.9 0.0 5.2 8.1 3.4 0.6 5.5 8.3 10.4 4.9 - Primary deficit that stabilizes the debt-to-GDP ratio 5/ (In percent of GDP): -0.7 -0.2 1.2 0.1 0.9 3.2 5.6 5.2 4.9 4.3 3.0 0.1 3.7 - PV of contingent liabilities (not included in public sector debt): 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 ### Stress tests, sensitivity and tailored scenarios (high level) - The DSA presents alternative and bound scenarios and tailored tests (e.g., real GDP growth shock, primary balance shock, exports shock, one-time 30 percent nominal depreciation, combination shocks, combined contingent liabilities, market financing shock). - Table 3 and Table 4 present sensitivity analysis for key indicators of public and PPG external debt and public debt under these scenarios for 2020–2030 with thresholds provided for each indicator. - Figures show indicators under alternative scenarios and the most extreme shocks (e.g., most extreme shock for external PPG MLT debt is one-time depreciation in some tests; for public debt some extreme shocks are exports-related). ### Policy implications and recommendations reflected in the DSA - Continue prioritizing concessional external financing to ease debt repayment pressures. - Develop domestic capital markets to diversify financing sources. - Implement pre-financing and buyback strategies to mitigate Eurobond rollover risk. - Expand fiscal reporting coverage (GFSM2014) and compile a financial balance sheet of the non-financial public sector to improve debt monitoring. *Sources: Country authorities; and staff estimates and projections. (Text and tables as provided in the DSA excerpt.)* ### 8.9 percentage points in the second year of the projection compared to the baseline scenar io. ### 1rwaea2021001 - 8.9 percentage points in the second year of the projection compared to the baseline scenario. ### Debt stress tests and customized scenarios - “Larger Bugesera scenario” raises the total cost of the project to US$1.8 billion from US$1.5 billion in the baseline scenario. - “Larger contingent liability scenario” involves a one-off additional increase in the debt-to-GDP ratio of 8.9 percentage points in the second year of the projection compared to the baseline scenario. - Indicators presented in customized scenarios include: - Debt service-to-revenue ratio (time series displayed for 2020–2030). - PV of debt-to-exports ratio (time series displayed for 2020–2030). - PV of debt-to-GDP ratio (time series displayed for 2020–2030). - Debt service-to-exports ratio (time series displayed for 2020–2030). - PV of Debt-to-Revenue Ratio (time series displayed for 2020–2030). - Public debt benchmark and Debt Service-to-Revenue Ratio (time series displayed for 2020–2030). ### Recent developments and program performance - Emergency financing and program support: - Two timely disbursements under the Rapid Credit Facility (RCF-1 and RCF-2) in April and June supported the authorities’ early COVID-19 response and the program backed by the Policy Coordination Instrument (PCI). - Macroeconomic impact of COVID-19: - GDP growth in 2020 should drop sharply to -0.2 percent from 9.4 percent in 2019. - Headline inflation declined to 4.2 percent y/y in November. - Program implementation: - All end-June quantitative targets (QTs) were met except the ceiling on the debt-creating overall deficit. - Two out of four structural reform targets (RTs) were met; two were missed due to pandemic-related delays. - One RT met ahead of schedule: production of financial and managerial reports from the IT system for all Rwanda Social Security Board (RSSB) schemes. ### Policy priorities, outlook, and projections - Short-term priorities: - Support the economy while maintaining fiscal responsibility and resuming structural reforms. - Continue implementation of the Economic Recovery Plan (ERP) to support vulnerable households and affected businesses. - Outlook and projections: - Authorities expect GDP growth to recover and reach 8 percent by 2023. - Authorities expect inflation to be kept under control going forward. - Risks and vigilance: - Authorities are mindful of downside risks domestically and internationally and will monitor fiscal stance and contingent liabilities to prevent further worsening of the public debt profile. ### Fiscal policy and debt sustainability - Fiscal measures and revenue actions: - Rwanda Revenue Authority measures included suspension of tax audits; extension of deadlines for filing and paying corporate income tax (CIT); a waiver for taxes for the hospitality sector and private schools; and VAT exemptions for face masks and other essential medical equipment. - Fiscal outcomes and targets: - The impact of the pandemic on fiscal revenue and support measures are bringing the overall deficit this fiscal year to about 8.5 percent of GDP. - Combined fiscal actions should help achieve the objective of the large deficit reduction of 1.4 percentage points of GDP through FY2022/2023. - Debt sustainability focus: - Rwanda has slipped from low to moderate risk of debt distress. - Fiscal consolidation and sound debt management, including monitoring fiscal risks related to SOEs, aim to have debt converging to its medium-term anchor by 2028. ### Monetary and financial sector policies - Monetary policy response: - Cuts to the central bank’s policy rate, liquidity support measures, and allowance for restructuring of performing loans facing temporary cash flow challenges. - Authorities will continue to pursue prudent monetary policy, maintain a flexible exchange rate, and transition to an interest rate-based monetary policy framework. - Financial sector resilience: - The financial sector remains broadly sound, with robust pre-COVID-19 capital and liquidity buffers and an aggregate liquidity coverage ratio. - The banking sector’s capital adequacy ratio exceeds the minimum requirement. - Non-performing loans (NPLs) ratio has increased, particularly in the microfinance sector. - Progress toward greater financial inclusion with the expansion of microfinance activity, including Savings and Credit Cooperatives (SACCOs). - Strengthening of the deposit guarantee fund for banks and microfinance institutions. ### Structural reforms, transformation agenda, and governance - Vision and strategies: - Vision 2050 aims for structural transformation to achieve middle-income status by 2035. - Implementation of the 2017-24 National Strategy for Transformation (NST) around economic transformation, social transformation, and transformative governance. - Private sector and investment: - Emphasis on improving the business climate to boost private investment and fostering a knowledge-based economy driven by innovation and higher value-added services and industries. - Tourism sector to benefit from strategic investments such as the new Bugesera Airport. - Transparency and governance: - Authorities will undertake ex-post audits and publish all expenditures related to the Pandemic. - Contemplate publishing beneficial ownership information for companies awarded COVID-19-related government contracts. - Institutionalized policy of zero-corruption tolerance and accountability principles. *Source: 1rwaea2021001 - 8.9 percentage points in the second year of the projection compared to the baseline scenario.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1rwaea2021001.pdf_