## _cr06246

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### Overview of the Annual Progress Report (APR)
- APR reviews implementation of the PRS during August 2004 to July 2005 and will inform revisions to the PRS (EDPRS) to be finalized in March 2007.
- APR analyzes: (i) the participatory approach; (ii) donor coordination; (iii) growth-enhancing policies; and (iv) accountability and governance issues.
- Health and education:
  - Access to health services has improved; a new health sector strategy was completed to address maternal and child mortality.
  - Gross primary education has risen to 131 percent of the school age population.
  - Net primary school enrollment remains at 93 percent.
  - The first three years of secondary education were made part of free basic education.
- Water and sanitation:
  - A new Water and Sanitation Policy based on a decentralized approach was adopted in 2004 and is being implemented (completion of contract models and standards to assist districts in contracting private operators; promotion of sanitation technologies in rural areas).
- Private sector and trade:
  - Agricultural and export sector strategies were completed; parliament adopted the land law to strengthen property rights and registration.
  - Judicial simplification cut time to resolve disputes by more than 20 percent and attorney fees fell by 15 percent.
  - Rwanda became increasingly active in COMESA, began negotiations on the Economic Partnership Agreement with the EU, and started accession to the East African Community (EAC).
- Capacity constraints and governance:
  - Capacity constraints slowed reforms in financial and expenditure management and procurement.
  - Capacity needs assessments completed and discussed with donors; a training program for government accountants started; the law establishing the office of the Ombudsman was gazetted.
  - Decentralization progressed with restructuring of administrative zones.
- Key concerns:
  - Current average per capita growth rate of about 2 percent is insufficient to achieve Vision 2020’s target of halving poverty by 2020.
  - Reporting on rural development and poverty reduction targets is not comprehensive enough.
  - Rural health centers lack sufficient equipment; agriculture remains highly vulnerable to climatic and terms of trade shocks.
  - Economy affected by energy shortages and trade impeded by supply-side restrictions.

### Macroeconomic and Financial Management
- Medium-term framework and growth projections:
  - APR presents outlook until 2008 but lacks clear analysis of sources of and obstacles to growth and link to sectoral policies through costing and prioritization.
  - Staffs recommend basing the macroeconomic framework on more conservative growth projections and supplementing it with downside and upside scenarios, including a scaling up of aid inflows.
  - A scaling up scenario should analyze aid absorption and capacity constraints and coordination of macroeconomic policies in light of a possible appreciation of the real exchange rate.
- Financing and debt:
  - APR emphasizes reliance predominantly on grant financing, to be done in the context of a long-term debt sustainability analysis, including stress tests.
  - Despite relief under the enhanced HIPC Initiative and the MDRI, focus on debt sustainability must be maintained.
  - Debt relief under both initiatives is expected to lower the NPV of debt-to-export ratio to about 70 percent at end-2006.
  - Given Rwanda’s small export base and vulnerability to exogenous shocks, new borrowing should remain limited for the foreseeable future.
  - Staffs urge development of a comprehensive debt management strategy and strengthened debt management.
- Revenue and spending:
  - Staffs urge authorities to continue to increase the current revenue-to-GDP ratio as had been done in recent years.
  - The revenue-to-GDP ratio increased from about 10 percent in 2000 to over 14 percent in 2005.
  - Staffs welcome planned large increase in priority spending but note this will entail significant cuts in nonpriority spending.
  - In 2005 almost 30 percent of priority spending went to education, while health and agriculture received only 9 and 5 percent, respectively.
- Monitoring and implementation:
  - Need to strengthen monitoring and development of macro-relevant policies in the interim to the EDPRS; APR provides information only until early 2005.
  - Slippages in policy implementation (e.g., third quarter of 2005) should be avoided and rectified as soon as possible.
  - Establishing a unit to monitor implementation of macroeconomic policies is recommended; unit could assist in designing medium-term framework for a possible new PRGF arrangement.
  - Improve analysis of existing data to inform policy, particularly impacts on poverty indicators (consider forthcoming 2006 household survey and the demographic and health survey of 2005).
- Fiscal risks and arrears:
  - Authorities had domestic arrears of about one percent of GDP at end-September 2005.
  - Audit and business plan for Prime Holdings were delayed and reforms in public expenditure management stalled.

### Promoting Growth while Empowering the Poor
- Growth focus:
  - Generating high and sustained private sector-led growth is critical; ensure benefits reach rural areas where the majority of the poor are located.
  - Policy priorities: implement agricultural strategy, step up reforms to support trade and export promotion, address infrastructure bottlenecks; regional instability remains an obstacle.
- Agriculture and food security:
  - Agricultural strategy (Strategic Plan for Agricultural Transformation, PSTA) made operational; improvement in budget execution of the Ministry of Agriculture noted.
  - Food shortages in early 2006 highlight vulnerability to exogenous shocks and need for productivity-enhancing measures.
  - Need to step up human and institutional capacity building; formally link export promotion strategy with PSTA to avoid undermining food security.
  - Progress in implementing the new land law is needed to improve farmers’ access to credit by allowing the use of land as collateral.
- Trade and export promotion:
  - Staffs strongly recommend implementing structural reforms identified in the Diagnostic Trade Integration Study (DTIS) linked to poverty reduction and trade growth.
  - DTIS findings: trade is critical to growth and poverty reduction; increasing rural incomes requires raising productivity in traditional agriculture and developing nontraditional activities.
  - Progress: movement into high quality coffee; expected privatization of three more tea factories by March 2006.
  - Staffs underscore importance of:
    - (i) strengthening production and quality of traditional exports while stepping up export diversification;
    - (ii) promoting nonagricultural employment and output;
    - (iii) strengthening organization of the rural sector;
    - (iv) removing supply constraints.
  - Urged to prioritize these actions and set up a monitoring system for DTIS implementation clarifying roles and responsibilities.
- Infrastructure:
  - Telecommunications: substantial improvements with privatization of Rwandatel and additional satellite terminals in rural areas.
  - Roads: APR reports efforts to rehabilitate the road network but lacks clear information on rural developments.
  - Electricity: progress toward identifying investors for the Lake Kivu methane gas project and increase in electricity tariff rates to more closely reflect cost of generation.
  - Need to move toward a differentiated tariff structure and give more attention to energy shortages in rural areas.
  - Strategic planning process in the Ministry of Infrastructure needs strengthening; greater focus required on rural areas.

### Improving Public Service Delivery
- Linking policies to poverty reduction:
  - Need to improve public expenditure management and establish a link between government policies and the MDGs, including poverty reduction.
  - When transferring responsibilities to local governments, distinguish fiscal, administrative, and political decentralization and sectoral differences in transfer of authority.
- Capacity building and civil service reform:
  - Weak administrative capacity is a major obstacle; capacity building and civil service reform are critical.
  - Human Resource and Institutional Development Agency (HIDA) has taken on coordination role for human resource and capacity development issues.
  - Recent restructuring of administrative zones poses a challenge to HIDA, including clarifying roles and responsibilities for service delivery.
  - Critical need to retain and motivate scarce technical and managerial experts.
  - Urgent need to undertake, in cooperation with donors, a comprehensive review of the entire civil service wage structure, including fringe benefits, in the context of a medium-term needs assessment.
- Monitoring and evaluation:
  - Efforts should focus on monitoring and evaluation of pilot programs on performance-based contracts in education and health with a view to scale up and expand to other sectors where appropriate.

### Conclusion: Key priorities and recommendations
- Staffs view the APR as a fair and candid assessment of PRSP implementation year three; achievements notable in education, water, and electricity; new health and agricultural strategies expected to revive momentum.
- Remaining challenges: poverty affects two thirds of the population (particularly rural areas); capacity constraints hinder reform implementation; growth hampered by energy shortages, infrastructure bottlenecks, and barriers to trade.
- Critical areas to accelerate reforms and advance toward the MDGs and prepare for the EDPRS:
  - (i) embed reforms in a medium-term macroeconomic framework, including a debt sustainability analysis while linking PRSP priorities with the MTEF;
  - (ii) implement growth-enhancing strategies, particularly in agriculture, infrastructure, and trade, to boost economic growth and empower the poor;
  - (iii) strengthen public service delivery, including through capacity building, while focusing it better on reducing poverty.

*Prepared by the Staffs of the International Monetary Fund and The International Development Association; Approved by Sharmini Coorey and Mark Plant (IMF), and Gobind Nankani (IDA); March 27, 2006.*

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