## Rwanda: 2002 Article IV Consultation and Requests for a New PRGF Arrangement and Additional Interim HIPC Assistance — Public Information Notice (PIN) No. 02/104 (Corrected: 10/15/02)

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### Background and recent performance
- Real GDP growth in 2001: 6.7 percent.
- External transfers in 2001: equivalent to 11.5 percent of GDP.
- Current account deficit (excluding grants) in 2001: 16.4 percent of GDP, roughly unchanged from 2002.
- Consumer price inflation in 2001: 3.4 percent (down from 3.9 percent in 2000).
- Broad money growth in 2001: 10 percent, largely fueled by foreign currency inflows.
- Gross reserves: increased to cover 5.7 months of imports of goods and nonfactor services (National Bank of Rwanda).
- Fiscal performance in 2001:
  - Revenue-to-GDP ratio: 11.4 percent (2001) up from 9.7 percent (2000).
  - Fiscal deficit (excluding grants) in 2001: 9.5 percent of GDP (nearly one percentage point lower than targeted), reflecting lower-than-envisaged implementation of foreign-financed capital projects.
- Structural reforms initiated in 2001 included:
  - Development of a system for monitoring poverty-reducing spending.
  - Introduction of a value-added tax (VAT).
  - Start of weekly foreign exchange auctions by the NBR.
  - Strengthening of the Office of the Auditor General.
- 2002 fiscal policy intentions:
  - Government will limit the overall fiscal deficit to below 9.9 percent of GDP.
  - Programmed spending includes demobilization and reintegration of army soldiers and ex-combatants, fiscal decentralization, and jurisdiction of genocide-related trials.
  - Revenue measures implemented: increase in the VAT rate to 18 percent from 15 percent; harmonization of customs tariff structure to proposals for a common external tariff under COMESA.
  - Corporate income tax reduction to harmonize with neighboring countries.
- Medium-term projections and targets:
  - Fiscal deficit targets: 9.4 percent of GDP in 2003; 8.0 percent of GDP in 2004.
  - External current account deficit projected to decline to 13.6 percent of GDP by 2004.
  - Revenue measures to accompany program: excise tax on cars; reform of the personal income tax.
- PRSP and HIPC:
  - First full Poverty Reduction Strategy Paper (PRSP) issued in June 2002.
  - Rwanda can reach the completion point under the enhanced HIPC Initiative in 2003.

### Executive Board assessment — main findings and policy recommendations
- Commendations and overarching concerns:
  - Directors commended progress in laying foundations for robust growth and poverty reduction amid difficult conditions, highlighting reintegration, safety nets for genocide survivors, local government elections, constitutional work, and judicial training.
  - Directors stressed that sustained growth and enduring poverty reduction depend crucially on a just and durable security settlement in Rwanda and the Great Lakes region and urged authorities to pursue peace relentlessly.
- Fiscal transparency and public financial management:
  - Emphasis on need for fiscal transparency, including on defense expenditures.
  - Urgent establishment of effective expenditure tracking and financial reporting systems, to be developed with direct World Bank engagement, so demobilization and reintegration programs are subject to adequate monitoring and accounting.
  - Continued strengthening of public financial administration remains a priority: reinforced Office of the Auditor-General, publication of audit reports and government financial operation data, inclusion of demobilization and reintegration accounts for 2002 in the Auditor-General’s program.
- Macroeconomic stability and fiscal stance:
  - Directors viewed 2001 performance as broadly encouraging: strong growth, moderate inflation (partly due to climatic conditions), and an above-target rise in official reserves.
  - Prudent fiscal stance deemed essential to avoid deterioration in debt sustainability indicators beyond projected levels.
  - Encouraged by the limited rise in the deficit on domestic fiscal operations projected in 2002 and the commitment to reverse this from 2003 onward.
- Revenue mobilization and tax policy:
  - Success in the revenue effort under the program seen as critical to secure financing consistent with continued stability during nation-building.
  - Recent VAT increase to regional average and tariff adjustments in line with preliminary COMESA proposals considered significant contributions to meeting revenue targets.
  - Further improvements to Rwanda Revenue Authority (RRA) capacity remain essential.
- Expenditure priorities and implementation capacity:
  - Directors praised the authorities’ expenditure program for encompassing priority actions for social, political, and economic transformation (constitutional reform, decentralization, governance strengthening).
  - Emphasis on importance of reducing unproductive expenditure.
  - Some Directors questioned whether authorities could fully implement the expenditure plans given current capacity constraints.
- Monetary and exchange rate policy:
  - Current floating exchange rate regime viewed as continuing to serve Rwanda well.
  - Authorities’ commitment to establishing low inflation as a norm welcomed.
  - NBR urged to monitor liquidity closely and to tighten policy aggressively when needed.
- External vulnerability, debt management, and donor support:
  - Noted Rwanda’s extremely narrow export base, continued dependence on external financing, and vulnerability to external shocks.
  - Capital inflows and relative price shifts must not undermine market incentives for productive activities and diversification.
  - Urged strengthening of debt management system.
  - Several Directors concerned about lengthy period over which Rwanda’s debt ratios are projected to decline to sustainable levels; stressed that international community must continue to provide adequate financial assistance.
- Financial sector and banking:
  - Directors expressed concern about the precarious health of the banking sector and urged prompt action.
  - Called for a timely action plan, in consultation with World Bank and Fund staff, to address problems in a commercial bank under provisional NBR control to safeguard assets and limit potential fiscal burden.
  - Welcomed authorities’ interest in participating in the FSAP program.
- Anti–money laundering and terrorism finance:
  - Encouraged resolute movement with measures to combat money laundering and financing for terrorism.
  - Welcomed authorities’ commitment to develop, with anti-money laundering experts, a road map outlining required technical assistance and major milestones.
- Statistics and data weaknesses:
  - Noted many weaknesses in macroeconomic statistics, especially national accounts, government finance, and balance of payments.
  - Further strengthening of statistical capacity remains a priority; advised authorities to take advantage of available technical assistance, including from the Fund.

### Selected economic and financial indicators (as presented)
- Real GDP growth (annual percent change):
  - 1994: -50.2
  - 1995: 35.2
  - 1996: 12.7
  - 1997: 13.8
  - 1998: 8.9
  - 1999: 7.6
  - 2000: 6.0
  - 2001: 6.7
- Consumer prices (end of period; annual percent change):
  - 1994: 64.4
  - 1995: 38.4
  - 1996: 8.7
  - 1997: 16.6
  - 1998: -6.0
  - 1999: 2.1
  - 2000: 5.8
  - 2001: -0.2
- Exports, f.o.b. (millions of U.S. dollars):
  - 1994: 32.2
  - 1995: 50.4
  - 1996: 62.0
  - 1997: 93.0
  - 1998: 64.1
  - 1999: 62.0
  - 2000: 89.8
  - 2001: 93.3
- Current account balance (millions of U.S. dollars):
  - 1994: -399.4
  - 1995: -246.2
  - 1996: -266.8
  - 1997: -321.6
  - 1998: -339.0
  - 1999: -323.0
  - 2000: -295.8
  - 2001: -279.2
- Capital account balance (millions of U.S. dollars):
  - 1994: 6.9
  - 1995: 93.5
  - 1996: 90.0
  - 1997: 115.9
  - 1998: 95.1
  - 1999: 70.9
  - 2000: 62.0
  - 2001: 70.1
- Financial account balance (millions of U.S. dollars):
  - 1994: -3.5
  - 1995: -19.0
  - 1996: 23.3
  - 1997: 44.6
  - 1998: 51.5
  - 1999: 63.9
  - 2000: 43.4
  - 2001: 73.3
  - Private capital (net) (millions of U.S. dollars):
    - 1994: 12.4
    - 1995: -45.0
    - 1996: -11.4
    - 1997: 3.8
    - 1998: 5.0
    - 1999: 12.2
    - 2000: 11.8
    - 2001: 22.4
  - Public capital (net) (millions of U.S. dollars):
    - 1994: -15.9
    - 1995: 25.9
    - 1996: 34.6
    - 1997: 40.8
    - 1998: 46.5
    - 1999: 51.8
    - 2000: 31.6
    - 2001: 50.9
- Capital and financial account balance (millions of U.S. dollars):
  - 1994: 3.4
  - 1995: 74.5
  - 1996: 113.3
  - 1997: 160.5
  - 1998: 146.6
  - 1999: 134.8
  - 2000: 105.4
  - 2001: 143.4
- Current account balance, excluding official transfers (in percent of GDP):
  - 1994: -53.0
  - 1995: -19.0
  - 1996: -19.3
  - 1997: -17.4
  - 1998: -17.0
  - 1999: -16.7
  - 2000: -16.3
  - 2001: -16.4
- Change in real effective exchange rate (in percent, + = appreciation):
  - 1995: 51.9
  - 1996: -39.7
  - 1997: 8.6
  - 1998: 26.9
  - 1999: -18.3
  - 2000: 5.4
  - 2001: -9.6
  - 2002 (presented in text as roughly unchanged from 2001 for current account excluding grants)
- Overall fiscal balance excluding grants (in percent of GDP):
  - 1994: -12.4
  - 1995: -13.7
  - 1996: -13.2
  - 1997: -9.2
  - 1998: -8.3
  - 1999: -9.7
  - 2000: -8.9
  - 2001: -9.5
- Change in broad money (in percent):
  - 1994: -6.5
  - 1995: 73.7
  - 1996: 8.2
  - 1997: 47.5
  - 1998: -3.9
  - 1999: 6.6
  - 2000: 14.4
  - 2001: 10.0
- Interest rate (one-year savings deposits, in percent):
  - 1995: 9.0
  - 1996: 12.0
  - 1997: 11.0
  - 1998: 11.4
  - 1999: 10.0
  - 2000: 10.1
  - 2001: 11.6
  - 2002 (listed as): 10.2

*Source: International Monetary Fund staff report and Public Information Notice, July 24, 2002 (Corrected: 10/15/02).*

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