## _cr1119 ## Source details **Canonical URL:** [_cr1119](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1119.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1119.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1119.pdf.json) --- ### Macroeconomic performance and outlook - Real GDP growth: - 2008: 11.2 percent - 2009: 4.1 percent - 2010 (expected): 6.5 percent - Projected 2011-12: 6½ - 7 percent - Medium-term baseline: peak at 7 percent in 2012, stabilize at 6.5 percent thereafter - Potential/upside: about 8.4–8½ percent over the medium term under stronger investment and productivity - Inflation and reserves: - Annual inflation remained below 5 percent in 2010; projected to pick up to 6 percent in 2011 and stabilize at 5 percent over the medium term - Gross official reserves (Millions of U.S. dollars): 2009 = 742.2; 2010 = 744.3; projection 2011 = 737.2 - Gross reserves (in months of imports of goods and services): 2009 = 5.5; 2010 = 4.8; projection 2011 = 4.6 - External accounts: - External current account balance (Excluding official transfers): 2009 = -18.6 percent of GDP; 2010 = -19.3 percent of GDP (table); narrative notes narrowing to 17.3 percent of GDP in 2010 from 18.6 percent in 2009 (excluding grants) - Current account (incl. official transfers) projections: near-term widen to 9 percent in 2011, narrow to about 4 percent over the medium term - Trade and balance of payments highlights: exports rebound driven by coffee, tea, non-traditional exports; tourism underperformed; minerals flat ### Fiscal position, revenue mobilization, and public financial management - Fiscal aggregates and strategy: - Total revenue (excl. grants, percent of GDP): 2009 = 14.9; 2010 = 12.2; projection 2011 = 12.5 - Total expenditure and net lending (percent of GDP): 2009 = 26.4; 2010 = 25.9; projection 2011 = 25.8 - Overall fiscal balance (payment order) Before grants (percent of GDP): 2009 = -11.5; 2010 = -13.7; projection 2011 = -13.2 - After grants: 2009 = -2.2; 2010 = -1.1; projection 2011 = -0.1 - Fiscal stimulus: about 2 percent of GDP in 2009/10; FY 2010/11 overall deficit (excl. grants) widens to 13.8 percent of GDP (fiscal impulse ~½ percent of GDP) - Revenue risks and corrective measures: - Revised 2010/11 budget: revenue shortfalls estimated at Rwf 8½ billion (0.2 percent of GDP) largely from trade taxes and corporate income taxes - Authorities identified equivalent cuts in non-priority spending; net domestic financing at Rwf 80 billion (2.3 percent of GDP) - Staff recommendations to frontload tax administration measures, including automating RRA District Offices, accelerating audits/collection of social security taxes, and expediting arrears collection via SIGTAS - Medium-term targets: increase domestic revenues by 0.6 percent of GDP annual average; plan to narrow overall deficit (excl. grants) by 2.3 percent of GDP over three years; target zero net domestic financing - Public Financial Management (PFM): - Rollout of core IFMIS/Smartgov modules to 94 agencies; PEFA scores improved significantly since 2007 - Remaining weaknesses: regular dissemination of key fiscal information, assessment of SOE fiscal risks, multi-year fiscal planning, coverage/recording of project grants - Structural benchmark: publish quarterly budget execution reports on Ministry of Finance website starting first half of 2011 (continuous structural benchmark) ### Monetary policy, exchange rate, and monetary transmission - Monetary stance and operations: - Central bank cut key repo rate three times since November 2009 by a cumulative 300 basis points (200–300 bps references appear) - Reserve requirements lowered from 8 to 5 percent in February 2009 - NBR to maintain an accommodative stance while monitoring inflation; continue to use reserve money as operational anchor and policy rate for signaling - Monetary transmission findings (Box 4): - Interest rate pass-through is weak: - A 100 basis point increase in NBR policy rate yields a 2 BPS increase in bank lending rates in the long-run (compare: Uganda 44 BPS, Tanzania 32 BPS, Kenya 100 BPS) - Short-run responses are essentially non-existent in Rwanda - Deposit rates tend to be sticky and lending-deposit spreads widen with lending rate changes - Authorities expect lending rates to decline as deposit costs fall and transmission to strengthen with financial deepening - Exchange rate policy: - Interbank exchange rate corridor framework introduced (March/July 2010 references) - Rwandan franc depreciations noted: 2.5 percent (April–October 2010) and 3 percent (April–August 2010) against the US dollar in different sections - Staff recommends greater exchange rate flexibility; NBR intends to refine corridor, remove Average Reference Rate (ARR), and introduce market-based customer buying and selling rates (structural benchmark end January 2011) ### Financial sector soundness, inclusion, and supervision - Banking sector indicators (as of June 30, 2010 and panel data): - Capital adequacy ratio: 17.6 percent - NPLs / Gross Loans: decreased to 12.2 percent at end-June 2010 (from 13.1 percent in December 2009) - Return on equity: increased to 10.3 percent (June 30, 2010) - Return on assets: increased to 1.3 percent (June 30, 2010) - Strengths and vulnerabilities: - Banking sector generally sound, profitable, and well capitalized; internal stress tests show resilience to further loan portfolio deterioration - Weak supervisory capacity due to high turnover of trained bank examiners is a potential vulnerability - Financial market depth low in EAC: private sector credit to GDP and bank deposits ratios among lowest; broad financial inclusion gaps (survey: some 80 percent of population lacks formal access; footnote: 78 percent without access) - Inclusion and risks: - Licenses recently granted to some 400 SACCOs to operate as deposit-taking institutions; concerns over rapid expansion of MFIs/SACCOs given limited supervisory capacity and rising NPLs in microfinance sector - FSAP update planned for early 2011 to review licensing and supervision policies; NBR steps to revamp compensation and training to reduce turnover and build supervisory capacity - Policy recommendations: - Strengthen banking supervision and build/retain supervision staff (action plan and salary survey structural benchmarks) - Adopt transitional measures to mitigate vulnerability while awaiting FSAP recommendations - Sequence expansion of lending licenses for SACCOs/MFIs with supervisory capacity improvements ### Competitiveness, exports, and structural reforms - Export diversification and competitiveness: - Export base narrow: primary exports coffee, tea, and minerals; draft export diversification strategy delayed (submission to Cabinet shifted to end-January 2011) - Macroeconomic balance approach: current account “norm” = 3.4 percent of GDP; underlying current account deficit = 4.8 percent of GDP; required REER depreciation = 3.2 percent (elasticity -0.46) - External sustainability approach: NIIP projected ~-45 percent of GDP; stabilizing deficit = 4.6 percent of GDP; required REER depreciation ≈ 0.5 percent - Equilibrium REER approach: 2009 potential overvaluation ~11.4 percent; 2010 overvaluation likely lower given 6 percent REER depreciation through September 2010 - Business climate and growth drivers: - World Bank Doing Business 2011 rank: 58th out of 183 - Global Competitiveness Report 2010-2011: 5th in sub-Saharan Africa and 80th out of 139 countries - Medium-term growth drivers: (i) government strategic investments with a more business-friendly environment; (ii) recovery in external demand; (iii) pick-up in private credit - Best-case scenario requires additional investments of some US$200-400 million (or about 4-8 percent of GDP) annually beyond baseline; other estimates note at least $350 million (or 7 percent of GDP) a year to sustain higher growth - Policy guidance: - Prioritize public investment in infrastructure, skills, and education rather than broad tax exemptions - Carefully assess fiscal risks of PPPs and nonconcessional financing; submit medium-term debt strategy to Cabinet (moved to end-January 2011) ### Growth accounting and productivity - Historical contributions: - Real GDP growth averaged about 8 percent a year during 1998–2009 (up from 2 percent in the 1980s) - Contribution of TFP rose to 2.1 percent on average for 1998–2009; for 2004–2009, capital and TFP each contributed 2.9 percent to growth - About 28 percent of output growth during 1998–2009 derived from TFP gains (vs. 13 percent in other EAC countries) - Projections and scenarios: - Baseline: TFP peaks at 2.2 percent in 2015 in staff projection; output growth expected to peak at 7 percent in 2012 and stabilize at 6.5 percent - Upside scenario (“best case”): with investment reaching 25 percent of GDP by 2015 and TFP accelerating to 2.9 percent by 2013, economy could grow about 8.4 percent per annum ### Statistical improvements and data reporting - Progress: - NISR disseminated quarterly GDP estimates for Q1 and Q2 2010 and revised 2008–2009 estimates - Finalized design of Living Standards Measurement Questionnaire (EICV); 2010 household survey scheduled November 2010–October 2011 - Revised methodology for ex-ante and ex-post agricultural crop assessments; structural benchmark to start ex-post crop assessments from 2011 season A (SB end January 2011) - Surveys of cross-border trade improved balance of payments statistics; 2010/11 budget allocated more resources to national statistics office - Remaining weaknesses: - Lack of quarterly BOP statistics; methodological gaps in national accounts (no comprehensive economy-wide enterprise survey); uncertainty around size of informal sector - Reporting timetables: - Weekly data within seven days; monthly data within five weeks; official communication on program performance within 8 weeks of a test date ### Program performance, PSI, and program risks - PSI performance: - Overall assessment: satisfactory - All quantitative assessment criteria and structural benchmarks for end-June 2010 met except indicative target on consolidated domestic debt (issuance of T-bills due to late donor disbursements); expected repayment after donor funds disbursed - TMU and assessment criteria adjustments: - Adjustors revised for net foreign assets and net domestic financing to reflect donor grant delays - Reserve money targets realigned with seasonal currency in circulation - Consolidated domestic debt definition excludes NBR-issued debt for monetary policy purposes - One state-owned bank excluded from debt limit under PSI; request to exclude second bank (BRD) not accepted by staff - Program risks: - Main near-term risk: further deterioration in revenue outlook beyond revised FY 2010/11 budget - Downside risks: slower pickup in external demand and domestic credit; lower levels of investment financing and smaller productivity gains over longer term - Upside risk: higher global food and fuel prices could raise inflation above projections - Staff recommendations: - Complete first PSI review and modify assessment criteria for end-December 2010 based on performance - Strengthen medium-term fiscal framework (MTEF), improve costing of spending plans, better align projected grants with MTDS, and continue quarterly fiscal data dissemination ### Key structural benchmarks and policy timetable (selected) - NBR to eliminate Average Reference Rate (ARR) and introduce new customer buying/selling rates — End January 2011 (structural benchmark) - NISR to finalize revised ex-ante/ex-post agricultural crop assessment methodology — End December 2010 (SB) - NISR to begin ex-post crop assessments starting 2011 A season — SB end January 2011 - MINECOFIN to publish quarterly budget execution reports within 45 days of quarter end — Continuous starting mid-May 2011 - NBR action plan on compensation and professional development to Board — End March 2011; salary survey completed — End March 2011 - NBR to conduct minimum of 6 on-site bank inspections with NBR staff — End December 2010 (progress to be reviewed) *Source: _cr1119 — IMF staff report content, Letter of Intent and TMU (December 4, 2010) as provided.* ### 1. Millenium Development Goals ......................................................................................... ### 1. Millenium Development Goals ### I. Introduction - Rwanda has achieved high growth and macroeconomic stability over the last decade, with growth averaging about 8 percent a year. - Inflation, though volatile, is now in low single digits, and international reserves are at comfortable levels. - Financial sector deepening: ratio of private sector credit to GDP increased six-fold to 12 percent of GDP. - Vulnerabilities: low government revenues, a narrow export base, and severe bottlenecks in infrastructure. - Poverty remains high: 57 percent of the population living below the national poverty line in 2006. - Rwanda is unlikely to meet most Millennium Development Goals (MDGs), including halving its poverty by 2015, though significant progress has been made in many areas (see Box 1). - Fitch upgraded Rwanda’s sovereign rating in August to ‘B’. - The Fund’s Policy Support Instrument (PSI) supports a program to mitigate vulnerabilities while consolidating macroeconomic stability (Box 2). Box 1: Rwanda’s Progress in MDG Goals (selected facts) - Number of seats held by women in Rwanda’s parliament increased from 17 percent in 1994 to 52 percent in 2008. - Rwanda is very likely to meet—and possibly even surpass—the MDG targets for child and maternal mortality by 2015. - Rate of births attended by skilled staff increased from 39 percent to 52 percent between 2005 and 2008. - Proportion of children under five sleeping under insecticide-treated bed nets increased from 4 percent in 2000 to 56 percent in 2008/09. Box 2: Key Objectives of the PSI - Maintain a sustainable fiscal position, with increasing mobilizing domestic revenues aimed at reducing Rwanda’s aid dependency; - Strengthen monetary and exchange rate policies to ensure low and stable inflation; - Reduce financial sector vulnerabilities by strengthening banking supervision, and deepening the financial sector by enhancing access to credit; - Underpin growth with structural reforms to diversify the export base and improve the business environment. ### II. Recent Developments - Real GDP growth: - 2008: 11.2 percent - 2009: 4.1 percent - 2010 (expected): 6.5 percent, driven by rebound in exports and stronger-than-expected growth in services (mainly telecommunications) and construction. - Inflation: - Annual inflation remained below 5 percent in 2010. - External current account deficit (excluding grants): - 2009: 18.6 percent of GDP - 2010: 17.3 percent of GDP - International reserves: remain at comfortable levels (Table 3 and Figure 3 referenced). - Fiscal year: runs from July to June. - Fiscal performance FY 2009/10: domestic revenue collection exceeded the indicative target for the PSI during January–June 2010, mainly due to taxes on goods and services and direct taxes. - Temporary arrears: Rwf 7 billion, equivalent to 0.2 percent of GDP, built up in first quarter of 2010/11 (July–September 2010) due to lower revenues and delays in grants. - Monetary policy and credit: - Central bank cut key repo rate three times since November 2009 by a cumulative 300 basis points. - Central bank lowered reserve requirements from 8 to 5 percent in February 2009. - Commercial banks’ lending rates remained persistently high; credit to private sector rebounded in 2010 but slower than envisaged. - Non-performing loans and loan loss provisions edged down in 2010. - Exchange rate: - Interbank exchange rate corridor framework introduced in March 2010. - Rwandan franc depreciated by 2.5 percent against the US dollar between April and October 2010. - Depreciation reflected strengthening of the US dollar against euro and pound sterling in first three quarters of 2010 and similar movements in other EAC currencies. - External sector developments: - Higher export performance in 2010 reflecting rebound in international prices and stronger volumes of coffee, tea, and non-traditional exports. - Tourism performed below expectations and mineral exports were flat in spite of higher prices. - Private transfers and donor support contributed to narrower current account deficit in 2010. - Foreign direct investment expected to be lower in 2010 due to delay in large investment deals. ### III. Program Performance - Overall assessment: Performance under the PSI has been satisfactory. - Quantitative and structural performance: - All quantitative assessment criteria and structural benchmarks under the PSI for end-June 2010 were met (MEFP Tables 1 and 2). - Indicative target on domestic debt of the public sector was missed at end-June 2010 because government issued Treasury bills to ease tight cash flow due to late donor disbursements; debt expected to be repaid soon as donor funds have been disbursed. - Structural reforms and institutional progress: - Public Financial Management: rollout of core modules of the Integrated Financial Management Information System (IFMIS/Smartgov) to 94 agencies. - Revenue administration: Rwanda Revenue Authority (RRA) took over collection and audit functions of social security contributions. - National Bank of Rwanda (NBR): enhanced monetary policy effectiveness through frequent Monetary Policy Committee (MPC) meetings and improved communication strategy. - Exchange rate corridor framework introduced at NBR as transition toward greater exchange rate flexibility. - Structural benchmarks July–September 2010: all met except for submission of an export diversification strategy to Cabinet; draft was available but will be submitted by end-January (pending stakeholder review). - Medium-term debt strategy submission moved to end-January 2011 (originally end-December 2010) owing to delay in hiring consultants. Additional program-related facts - EAC convergence criteria performance (2009/10): Rwanda has a better track record than other EAC members in meeting criteria; among four EAC criteria, only the overall balance (excl. grants) was not met due to historically high donor flows. ### IV. Policy Discussions: Maintaining Macroeconomic Stability While Boosting Growth and Competitiveness - Outlook highlights: - Real GDP growth projection chart referenced for 2008–2015 showing Rwanda, East African Community, and Sub-Saharan Africa trajectories (figure indicates recovery and medium-term outlook). - Key policy priorities indicated by program: - Maintain sustainable fiscal position and increase domestic revenue mobilization to reduce aid dependency. - Strengthen monetary and exchange rate policies to ensure low and stable inflation. - Reduce financial sector vulnerabilities: strengthen banking supervision and deepen financial sector to improve access to credit. - Implement structural reforms to diversify export base and improve business environment to underpin broad-based growth. *Source: _cr1119 - 1. Millenium Development Goals (IMF staff report content provided).* ### 9. The economic outlook is favorable ### 9. The economic outlook is favorable ### Growth outlook and drivers - Real GDP growth is projected at 6½ - 7 percent in 2011-12, similar to the outlook in the region and higher than the growth projections for Sub-Saharan Africa as a whole. - Medium-term growth drivers: - (i) the government’s strategic investments, supported by a more business-friendly environment; - (ii) recovery in external demand; - (iii) a pick-up in credit to the private sector. - The outlook assumes a conservative implementation of the government’s investment strategy, in view of the timing needed to secure the necessary financing. - With the onset of recovery, inflation is expected to pick up to 6 percent in 2011 from the exceptionally low levels recorded in 2010, but should stabilize at 5 percent over the medium term. - The current account deficit in the near term is expected to widen to 9 percent in 2011 due to higher imports for large investment projects, but is projected to narrow down to about 4 percent over the medium-term. ### Potential and scenarios for higher growth - Staff analysis: Rwanda’s economy could potentially grow at about 8½ percent over the medium term, provided that: - (i) investment is scaled up significantly; - (ii) productivity growth increases and remains elevated; - (iii) there are no adverse shocks. - Achieving and maintaining the higher growth rate requires additional investments of some US$200-400 million (or about 4-8 percent of GDP) annually over the medium-term, beyond assumed investments in the baseline projections. - Box 3 (sources of growth) highlights: - Productivity gains explained a substantial part of past growth; productivity gains peak at 2.2 percent in 2015 in the baseline. - Best case scenario: the economy could potentially grow by 8.4 percent per annum with significantly higher private investment and productivity gains approaching close to 3 percent by 2015, assuming no adverse shocks. ### Risks to the outlook - Downside risks: - Slower pickup in external demand and domestic credit. - Over the longer term, lower levels of investment financing and smaller productivity gains than envisaged. - Upside risk: - Higher global food and fuel prices could push inflation above projections. - Donor flows are expected to remain strong but decline gradually over the medium term. ### Authorities’ views on outlook - Authorities broadly agreed with staff’s views but saw stronger growth prospects and low/manageable risks. - They expected growth in 2010 and 2011 to be higher than 7 percent, driven by a stronger turnaround in construction and services. - Authorities expected growth to accelerate to 8 percent per annum by 2014, conditional on fully securing the necessary financing, including crowding in the private sector. ### Fiscal stance and consolidation strategy - FY 2010/11 fiscal policy remains somewhat expansionary to support recovery with gradual consolidation thereafter. - After a stimulus of about 2 percent of GDP in 2009/10, the overall deficit (excl. grants) in FY 2010/11 widens to 13.8 percent of GDP—a fiscal impulse of about ½ percent of GDP. The overall fiscal deficit (incl. grants) would widen by 3½ percent of GDP as external grants decline by an equivalent amount. - Current spending in 2010/11 remains unchanged at 2009/10 levels, but reoriented toward domestic capital investment (energy, schools, irrigation). - Temporary increase in net domestic financing supports higher total spending, while still allowing a large increase (22 percent) in credit to private sector in the period. - Authorities’ medium-term fiscal strategy: - Annual average reduction in higher spending of 0.2 percent of GDP. - Continued increases in domestic revenues of 0.6 percent of GDP annual average. - Plan to narrow the overall deficit (excl. grants) by 2.3 percent of GDP over the next three years. - Target zero net domestic financing to avoid crowding out the private sector. - Strengthen the medium-term fiscal framework (MTFF) by improving costing of government spending plans, better projection of grants, and a new medium-term debt strategy (to be submitted to Cabinet by end-January 2011). - Publish quarterly reports on budget execution on the Ministry of Finance website starting in the first half of 2011 (new structural benchmark), with future mid-year macro-fiscal updates. ### Revenue mobilization and tax administration - A lower revenue outlook for 2010/11 prompted a revised 2010/11 budget. Revenue shortfalls estimated at Rwf 8½ billion (0.2 percent of GDP) due mainly to lower trade taxes and corporate income taxes. - Authorities identified equivalent cuts in non-priority spending, leaving net domestic financing at Rwf 80 billion (2.3 percent of GDP). - Authorities applied for EU-COMESA grants to compensate revenue losses from trade liberalization; receipts excluded from the 2010/11 budget but contingency plans exist to spend them if received. - Staff recommendation to frontload tax administration measures in response to permanent decline in trade tax revenues, including: - (i) bringing forward fully automating services of the RRA District Offices (originally planned for March 2011); - (ii) accelerating audit and collection of social security taxes by the RRA; - (iii) expediting collection of tax arrears through SIGTAS (originally planned for December 2010). - Authorities’ response: - Reiterated commitment to domestic revenue mobilization. - Acknowledged original goal to increase domestic revenue mobilization by 1.4 percent of GDP for 2010/11 is no longer achievable; consider revised 1.1 percent of GDP target sufficiently frontloaded and ambitious. - Not considering tax policy measures at present but requested a tax policy TA mission from FAD. - Preferred to maintain planned timetable for tax administration measures while stepping up efforts to broaden the tax base and intensify arrears collection. ### Public financial management (PFM) reforms - Significant progress since 2007 in procurement policies, monitoring and containment of payment arrears, and improved transparency of taxpayer obligations and liabilities. - 2010 preliminary PEFA assessment indicates significant increases in PFM scores in many areas. - Remaining weaknesses identified by staff: - Regular dissemination of key fiscal information. - Assessment of fiscal risks of state-owned enterprises. - Multi-year fiscal planning. - Coverage and recording of project grants. *Source: IMF staff and Rwandan authorities (from "_cr1119 - 9. The economic outlook is favorable").* ### 25. The authorities agreed with the PEFA assessment. They noted ### _cr1119 - 25. The authorities agreed with the PEFA assessment. They noted ### Public Financial Management (PEFA) and reforms - Authorities concurred with the PEFA assessment and attributed higher PEFA scores to progress in PFM reforms over the past three years. - Noted improvements: - Legal framework for budget preparation. - Legislative oversight of the budget. - Forward actions: - Further deepening PFM reforms drawing on the PEFA assessment, donor partnerships, and IMF’s East AFRITAC. ### Mapping an Effective Monetary and Exchange Rate Policy - Recent stance and outlook: - The NBR pursued an accommodative monetary policy stance to support growth while inflation reached a historic low. - Credit growth projections: - Expected increase from a mere 6 percent at end-December 2009 to just over 10 percent by December 2010. - Looking ahead to 2011, credit to the private sector of about 22 percent is expected as the recovery takes hold. - Reserve money is expected to grow somewhat faster than nominal GDP given projected net credit to the government. - Authorities’ views on monetary policy: - Agreed with staff on maintaining the current accommodative stance while monitoring inflation and taking action if needed. - Attributed low inflation in 2010 to: - Global disinflationary trend. - A relatively stable exchange rate. - Modest increases in monetary aggregates. - A good harvest that kept domestic food prices low. - Inflation outlook: - Authorities and staff agreed inflation is likely to edge up to 6 percent at end-2011, up from a projected 4.6 percent at end-2010. - Institutional and operational enhancements: - NBR has become more proactive with quarterly MPC meetings and development of high-frequency data. - Authorities acknowledged need to enhance forecasting of liquidity and monetary operations; they look forward to forthcoming TA from MCM. ### Monetary Transmission (Box 4) — findings and implications - Key empirical findings: - Bank lending rates in Rwanda remain high and persistent despite fluctuations in the central bank policy rate. - Deposit rates and treasury-bill rates have declined since their local peak in July 2009. - Interest rate pass-through (from policy rate to lending rate) is weak in Rwanda compared with peers: - A 100 basis point (BPS) increase in the NBR policy rate renders a 2 BPS increase in bank lending rates in the long-run. - Comparable long-run effects: Uganda 44 BPS, Tanzania 32 BPS, Kenya 100 BPS. - Short-run responses: - A 100 BPS increase in the Central Bank of Kenya Rate yields a 19 BPS increase in lending rates in the short run, whereas short-run responses are non-existent in Rwanda. - Deposit rate dynamics: - Changes in deposit rates strongly respond to changes in lending rates in Kenya and Tanzania, but not in Rwanda. - Deposit rates in Rwanda tend to be sticky and spreads between lending and deposit rates tend to widen with changes in lending rates. - Policy and behavioral observations: - To mitigate tight liquidity in 2009, the NBR lowered its required reserves ratio from 8 to 5 percent in February 2009. - Banks appear to have responded by boosting excess reserves rather than increasing lending; demand for credit may have slowed due to lower economic growth following the global recession. - Expectations: - Authorities expect lending rates to decline early next year, commensurate with expected declines in costs of attracting deposits. - They expect monetary transmission to strengthen over time with further deepening of the financial sector and increasing competition. ### Exchange rate policy - Staff recommendation: - Exchange rate flexibility should be further enhanced to reflect market fundamentals and support low and stable inflation. - NBR would need capacity to determine when to intervene and re-base the exchange rate corridor, subordinating open market operations in the foreign exchange market to a reserve money anchor. - Authorities’ views and intended actions: - NBR will continue to use an appropriate mix of monetary policy instruments, including sale of foreign exchange to banks, to support low inflation. - Noted that the exchange rate moved more since the introduction of the corridor earlier this year than during the entire year 2009. - With assistance from MCM, NBR intends to further refine the exchange rate corridor to permit greater flexibility reflecting market fundamentals. - NBR intends to remove the current average reference rate (ARR) and introduce market-based customer buying and selling rates (new structural benchmark). ### Strengthening Financial Stability while Deepening Financial Markets - Banking sector soundness and risks: - The banking sector generally remains sound, profitable, and well capitalized. - Banks have been cautious in resuming lending to the private sector owing in part to elevated perceived risks after tight liquidity conditions in 2008–2009. - NBR internal stress tests show banks’ capital would be resilient to a further deterioration in loan portfolios. - High turnover of trained bank examiners weakens supervisory capacity at the NBR and is a potential vulnerability. - Financial inclusion and market depth: - Among the EAC, Rwanda has the lowest financial market depth as measured by ratios of private sector credit to GDP or bank deposits to GDP. - Survey results indicate some 80 percent of the population, mostly in rural areas, does not have formal access to financial products; a footnote specifies the fraction with no access to formal financial products amounts to 78 percent for Rwanda. - Authorities recently granted licenses to some 400 Savings and Credit Cooperatives (SACCOs) to operate as deposit-taking institutions, with a view to grant them lending licenses as well. - Risks from rapid expansion of MFIs and SACCOs: - Accelerated pace in expanding reach of microfinance institutions (MFIs) and SACCOs raises concerns given high and growing non-performing loans in the sector and capacity constraints at NBR to supervise them. - Rapid scaling up of lending licenses without corresponding supervisory capacity increases risk of non-performing loans and loss of deposits. - A forthcoming Financial Sector Assessment Program (FSAP) update (planned for early 2011) is expected to review current licensing policy for banks and non-bank financial institutions. - Authorities’ measures: - View financial deepening as important while addressing limited supervision capacity. - Noted they cannot deny lending licenses to SACCOs that meet minimum standards, but have not fully developed plans for direct supervision or delegated monitoring of MFIs and SACCOs. - NBR steps to build supervisory capacity include revamping compensation and training plans to stem high turnover of experienced bank examiners. - Authorities welcomed the FSAP update to help design an action plan to increase financial inclusion while limiting vulnerabilities. ### Boosting Competitiveness and Growth - Progress and challenges: - Staff analysis indicates the real exchange rate is broadly in line with economic fundamentals. - Rwanda ranks favorably in competitiveness: - World Bank Doing Business 2011 ranks Rwanda 58th out of 183. - Global Competitiveness Report 2010-2011 ranks Rwanda fifth in sub-Saharan Africa and 80th out of 139 countries. - Notable reforms include easier starting and closing of businesses, registering property, trading across borders, and investor protection. - Remaining challenges to narrow a large trade gap and broaden exports beyond tea, coffee, and minerals. - Policy initiatives: - Authorities have a draft export diversification strategy proposing subsidies, tax incentives, and exemptions to attract private investment. - Authorities are implementing an investment strategy to address infrastructure bottlenecks in transport and energy and may seek additional non-concessional financing, including PPPs, in the near term. - Authorities’ fiscal caution: - Taking a cautious approach to granting tax exemptions and mindful of fiscal risks associated with PPPs. - While the PPP unit is housed at the Rwanda Development Board (RDB), the Ministry of Finance will fully assess fiscal risks before decisions. ### Exchange rate assessment and external competitiveness (Box 5 — key quantitative findings) - Macroeconomic balance approach: - Current account deficit “norm” estimated at 3.4 percent of GDP. - Underlying current account deficit estimated at 4.8 percent of GDP. - With a current account elasticity of -0.46, a real effective exchange rate depreciation of 3.2 percent would be required to close the gap between the “norm” and the underlying current account deficit. - External sustainability approach: - Projected negative net international investment position of about 45 percent of GDP. - Net foreign liability stabilizing current account deficit estimated at 4.6 percent of GDP. - With elasticity of -0.46, a real effective exchange rate depreciation of about 0.5 percent would be required to close the gap. - Equilibrium real exchange rate approach: - Model suggests the real exchange rate has broadly been close to equilibrium; for 2009 it suggests a potential currency overvaluation of about 11.4 percent. - The real exchange rate overvaluation for 2010 is likely lower than 11.4 percent given actual REER depreciation of 6 percent through September 2010 and shifts in fundamentals. ### Statistical issues - Progress made: - Substantial progress in compilation and dissemination of economic statistics. - Notable improvements include disseminating quarterly GDP estimates, updating household expenditure survey, and revising methodology for ex-ante and ex-post agricultural crop assessments. - Ex-post agricultural survey planned for use in the upcoming 2011 season A crop (new structural benchmark). - Informal ex-post agricultural visits in 2009 and first half of 2010 were used to corroborate pre-harvest survey, resulting in a significant downward revision in agricultural output growth for 2010. - The 2010/11 budget allocated more resources to the national statistics office. - Surveys of cross-border trade have strengthened balance of payments statistics. - Remaining weaknesses: - Weaknesses remain in national accounts and balance of payments statistics, including: - Lack of quarterly BOP statistics hampers analysis of external trade performance and compilation of national accounts. - Methodological weaknesses in national accounts: lack of a comprehensive economy-wide enterprise survey, need to establish robust relationship between ex-ante and ex-post agricultural crop yields, and uncertainty surrounding the size of the informal sector. *Source: Excerpt from IMF staff report chapter and associated boxes and figures.* ### 39. The program risks may have elevated somewhat, notwithstanding the authorities’ ### _cr1119 - 39. The program risks may have elevated somewhat, notwithstanding the authorities’ ### Program risks and near-term fiscal concerns - The program risks may have elevated somewhat, notwithstanding the authorities’ commitment to their program. - The main risk includes further deterioration in the revenue outlook beyond the level that is already incorporated in the revised FY 2010/11 budget. ### Letter of Intent / MEFP updates - The appended Letter of Intent and accompanying Memorandum of Economic and Financial Policies (MEFP) outlines the authorities’ policy objectives for the remainder of 2010/11. - Quantitative assessment criteria and indicative targets and structural benchmarks for end-June 2011 are shown in Tables 1 and 2 of the MEFP. - The updated MEFP includes three additional structural benchmarks in fiscal, exchange rate policy and statistics for the period ending in June 2011. ### TMU updates and modifications to assessment criteria - The updated TMU includes some changes and modifications to the assessment criteria for end-December 2010 relative to the last staff report (IMF Country Report No. 10/200) and establishes assessment criteria for end-June 2011. - Specific changes: - The adjustors for net foreign assets and net domestic financing have been revised to keep pace with the size of delays in donor grants which have grown over time in Rwanda. This adjustment would allow the authorities greater flexibility in smoothing government spending, addressing temporary cash flow problems and maintaining prudent reserves. - Reserve money targets have been better aligned with seasonalities in currency in circulation. This would help the authorities manage repo operations in advance, thereby aiding in a better control over reserve money, which is the anchor for monetary policy. - For program purposes, the domestic debt―an indicative target under the PSI―excludes debt issued by the NBR for monetary policy purposes. This change removes interference of the cap on domestic debt limit with the central bank’s ability to effectively mop up excess liquidity to achieve its inflation objective. The proceeds from the sale of central bank debt would stay in a blocked account at the NBR and not available for budgetary financing. - In line with the Fund’s new debt limit policy, one state-owned commercial bank is now excluded from the debt limit under the PSI, on the grounds that the bank poses little fiscal risk since it has no history of receiving government transfers. This change would allow the bank to borrow on non-concessional terms without seeking or being granted a government guarantee. - The authorities also requested a second bank be excluded, the national development bank. The mission considered that this bank did not qualify for exclusion on the grounds that it poses fiscal risks, including because it lacks an independent management board and regularly receives budgetary transfers and tax exemptions. The authorities did not share the staff’s assessment and noted that the Fund’s policy on exclusions was not sufficiently flexible to allow for country-specific circumstances, including that the Rwanda government has no history of interfering in the operations of state-owned banks. ### Staff appraisal — macroeconomic outlook and risks - The economic outlook is favorable, but downside risks remain. - Over the short to medium-term, growth is driven by: - (i) the government’s investment strategy, supported by a more business-friendly environment; - (ii) recovery in external demand; and - (iii) pick-up in credit to the private sector. - Risks to the outlook remain on the downside, reflecting slower-than-expected pick-up in external demand and in domestic credit. - Rwanda has achieved high growth and macroeconomic stability over the last decade. - Rwanda’s resiliency to external shocks has improved further, thanks to prudent policies, substantial debt relief, and heavy reliance on concessional borrowing. - Sustained labor-intensive growth is needed to reduce poverty, which remains high. Removing infrastructure bottlenecks is a step in the right direction. Increase in agricultural productivity could generate sustainable employment for a large segment of the population who live in rural areas. ### Fiscal policy assessment and recommendations - The recent implementation of countercyclical fiscal and monetary policies to mitigate the impact of the global economic downturn is a welcome departure from the procyclical policies of the past. The authorities should build on this momentum to enhance their capacity to implement countercyclical policies in the future. - The authorities’ medium-term path toward fiscal consolidation is welcomed. - After a large stimulus in 2009/10, a further though much smaller stimulus in 2010/11 seems to be appropriate as it further supports the nascent recovery. - Looking ahead, fiscal consolidation is anchored on: - (i) gradually reducing spending, while protecting priority spending in line with poverty reduction strategy; - (ii) boosting domestic revenues through tax administration while addressing shortfalls in trade taxes. - Tax policy reforms should also be considered in the future in order to support the authorities’ domestic revenue mobilization efforts. - The medium term fiscal framework needs to be strengthened further. Important steps include: - better costing of government spending plans in the MTEF, - better alignment of projected external grants with a level of NDF that is informed by a MTDS, as well as - continued commitment to quarterly dissemination of fiscal data and fiscal strategy which would anchor fiscal expectations. - Reforms of PFM and debt management capacity and expenditure rationalization need to be implemented vigorously. These include implementing well designed public investment projects and their monitoring, improving the coverage of project grants, and enhancing the overall capacity to assess the costs and benefits of scaled-up nonconcessional financing, including fiscal risks associated with the PPPs. ### Monetary policy, financial sector, and supervision - The monetary transmission mechanism needs to be strengthened. This includes strengthening monetary operations of the NBR, enhancing exchange rate flexibility, creating an active interbank market and deepening the financial markets. - Although some of these reforms are expected to gradually strengthen the interest rate pass-through, the NBR should continue to use its reserve money as the anchor in conducting monetary policy while using changes in its policy rate to strengthen its signaling role and interest rate pass through. - Development of an active debt market with longer-dated debt instruments would be a welcome step as it creates a yield curve for the monetary authorities to shape inflation expectations. However, progress in this direction requires a demonstrated need for ongoing government financing requirement―anchored in the government’s MTDS as well as asset and liability management―and a secondary market that provides a benchmark for government debt instruments of varying maturities. - The NBR’s MPC decision process and review of financial stability should be further enhanced by a sustained scaling up of analytical support. The authorities should build up the necessary expertise to provide analytical support for the MPC and monitor the implementation of the new exchange rate framework. - The authorities should continue reforms (with assistance from MCM) toward greater exchange rate flexibility to enhance monetary policy effectiveness and ensure that exchange rate responds to movements in economic fundamentals. - Further analytical work on financial stability aspects of the NBR’s semi-annual policy statement could also benefit from the FSAP Update mission planned for early 2011. - The NBR should develop an action plan that trains and retains staff for the banking supervision department. A transitional plan is needed to mitigate financial sector vulnerability while waiting for the FSAP Update to take up the issue in early 2011. - Deepening access to finance matters for growth and poverty reduction. However, the decision to grant license to lend to over 400 SACCOs and MFIs should take into account the limited supervision capacity at the NBR and other institutions. Recommendations on requirements for NBR’s lending licenses for SACCO’s and MFIs should await the outcome of the upcoming FSAP Update. ### Competitiveness, business climate, and statistics - The real exchange rate is broadly in line with the fundamentals, although Rwanda is still an expensive place to do business. - Improvements in business climate, infrastructure, and skills mix and education of the labor force are key to lowering the cost of doing business. - Public investment in these areas would therefore be preferable to granting tax exemptions to investors, since the latter could jeopardize fiscal sustainability. - Further improvements in national accounts and balance of payments statistics are needed. Specifically, efforts are needed to develop a comprehensive economy-wide enterprise survey to reduce uncertainty surrounding the size of the informal sector. ### Program monitoring and staff recommendation - Staff recommends completion of the first PSI review and modification of the assessment criteria for end-December 2010 under the PSI based on Rwanda’s performance and the strength of the program. *IMF staff report excerpt (paragraphs 39–55).* ### 56. It is recommended that the next Article IV consultation take place within ### _cr1119 - 56. It is recommended that the next Article IV consultation take place within ### Recommendation on Article IV consultation - It is recommended that the next Article IV consultation take place within 24 months, subject to the provisions of the decision on consultation cycles in program countries. ### Millennium Development Goals — key indicators (Table 1: Rwanda) - Goal 1: Eradicate extreme poverty and hunger - Employment to population ratio, 15+, total (%) 87 87 84 80 80 - Employment to population ratio, ages 15-24, total (%) 79 80 73 66 64 - Income share held by lowest 20% ....5.... - Malnutrition prevalence, weight for age (% of children under 5) 24..2018.. - Poverty gap at $1.25 a day (PPP) (%) ....38.... - Poverty headcount ratio at $1.25 a day (PPP) (% of population) ....77.... - Vulnerable employment, total (% of total employment) ..93...... - Goal 2: Achieve universal primary education - Literacy rate, youth female (% of females ages 15-24) 75..77..77 - Literacy rate, youth male (% of males ages 15-24) 75..79..77 - Persistence to last grade of primary, total (% of cohort) ....2731.. - Primary completion rate, total (% of relevant age group) 37..224054 - Total enrollment, primary (% net) ....768496 - Goal 3: Promote gender equality and empower women - Proportion of seats held by women in national parliaments (%) 17 17 17 49 56 - Ratio of female to male primary enrollment (%) 92..97 104 101 - Share of women employed in the nonagricultural sector (% of total nonagricultural employment) ..32.4 33.0 .... - Goal 4: Reduce child mortality - Immunization, measles (% of children ages 12-23 months) 83 84 74 89 92 - Mortality rate, infant (per 1,000 live births) 106 132 112 85 72 - Mortality rate, under-5 (per 1,000) 174 225 186 136 112 - Goal 5: Improve maternal health - Adolescent fertility rate (births per 1,000 women ages 15-19) ....50 40 36 - Births attended by skilled health staff (% of total) 26..313952 - Contraceptive prevalence (% of women ages 15-49) 21 14 13 17 36 - Maternal mortality ratio (modeled estimate, per 100,000 live births) ......1,300.. - Pregnant women receiving prenatal care (%) 94..929496 - Unmet need for contraception (% of married women ages 15-49) 39..3638.. - Goal 6: Combat HIV/AIDS, malaria, and other diseases - Incidence of tuberculosis (per 100,000 people) 167 241 348 418 387 - Prevalence of HIV, total (% of population ages 15-49) 9.2 7.0 4.7 3.1 2.8 - Tuberculosis case detection rate (all forms) ..33 31 26 26 - Goal 7: Ensure environmental sustainability - Forest area (% of land area) 12.9 13.4 13.9 19.5 21.7 - Improved sanitation facilities (% of population with access) 29 26 25 23 23 - Improved water source (% of population with access) 65 64 65 65 65 - Goal 8: Develop a global partnership for development - Net ODA received per capita (current US$) 40 128 40 64 96 - Debt service (PPG and IMF only, % of exports, excluding workers' remittances) 10 20 25 41 - Internet users (per 100 people) 0.0 0.0 0.1 0.6 3.1 - Mobile cellular subscriptions (per 100 people) 0 0 0 2 14 - Other - Fertility rate, total (births per woman) 7 6 6 6 5 - GNI per capita, Atlas method (current US$) 340 230 250 250 440 - GNI, Atlas method (current US$) (billions) 2.4 1.3 2.0 2.3 4.3 - Life expectancy at birth, total (years) 33 29 34 48 50 - Source: World Development Indicators (Figures in italics refer to periods other than those specified.) ### Macroeconomic projections and selected indicators (Table 2: Rwanda: Selected Economic and Financial Indicators, 2006–15) - Output and prices - Real GDP growth 9.2 5.5 11.2 4.1 5.4 6.5 6.5 7.0 6.8 6.5 6.5 - Real GDP (per capita) 7.3 3.3 8.9 2.0 3.2 4.3 4.3 4.8 4.6 4.3 4.3 - GDP deflator 9.8 13.2 12.6 11.0 6.7 3.8 5.2 5.1 5.1 5.2 5.2 - Consumer prices (period average) 8.8 9.1 15.4 10.3 6.4 3.2 5.3 5.5 5.0 5.0 5.0 - External sector - Export of goods, f.o.b (in U.S. dollars) 17.9 19.9 51.4 -28.0 24.6 48.1 -0.4 10.4 10.1 13.7 13.8 - Import of goods, f.o.b (in U.S. dollars) 26.2 30.2 51.5 16.4 19.1 11.9 19.6 -7.9 -1.0 6.8 8.1 - External current account balance (Including official transfers) -4.3 -2.2 -4.9 -8.5 -7.9 -6.7 -9.0 -6.4 -4.6 -3.9 -3.4 - External current account balance (Excluding official transfers) -12.3 -11.9 -14.4 -18.6 -19.3 -17.3 -20.2 -15.9 -13.2 -11.8 -10.6 - External debt (end of period) 15.6 15.3 14.4 14.5 16.4 14.9 17.7 18.2 17.3 16.1 14.8 - Net present value of external debt (percent of exports of goods and services) 53.1 57.7 49.9 89.2 102.8 92.5 125.7 130.1 116.8 101.0 86.6 - Gross reserves (in months of imports of goods and services) 5.6 4.7 4.6 5.5 4.8 4.6 5.2 5.1 4.8 4.7 4.7 - Gross official reserves (Millions of U.S. dollars) 439.6 552.4 596.4 742.2 744.3 737.2 767.3 755.7 756.4 797.6 843.6 - Money and credit - Broad money (M2) 31.3 30.8 24.2 13.1 12.4 12.9 13.8 14.0 13.3 13.0 13.0 - Reserve money 11.9 30.7 23.5 0.3 12.5 11.7 13.9 14.0 13.3 13.0 13.0 - Fiscal - Total revenue (excl. grants) 12.2 12.4 12.6 14.9 12.2 12.5 13.6 13.7 14.3 14.6 14.8 - Total expenditure and net lending 23.7 22.0 22.6 26.4 25.9 25.8 27.3 26.4 25.2 24.4 23.7 - Capital expenditure 7.6 7.0 8.2 11.1 9.8 10.1 11.6 10.4 9.1 8.4 8.0 - Primary fiscal balance -2.6 -1.6 -3.3 -2.2 -5.3 -5.2 -5.3 -5.0 -4.7 -4.4 -4.0 - Overall fiscal balance (payment order) After grants 5.2 -1.4 -0.2 -2.2 -1.1 -0.1 -3.6 -1.6 -0.7 -0.4 -0.4 - Overall fiscal balance (payment order) Before grants -11.5 -9.6 -10.0 -11.5 -13.7 -13.2 -13.8 -12.6 -10.9 -9.7 -8.9 - Memorandum: Nominal GDP (billions of Rwanda francs) 1,716 2,049 2,565 2,964 3,333 3,278 3,672 4,131 4,639 5,195 5,819 ### Balance of Payments — highlights (Table 3: Rwanda: Balance of Payments, 2007–15) - Exports (f.o.b.) — of which (Millions of U.S. dollars): - Coffee and tea 67.2 92.0 85.6 107.6 121.3 108.4 120.4 127.3 147.4 165.9 - Minerals 70.6 91.7 55.4 74.3 56.1 61.1 66.9 76.9 88.3 105.6 - Imports (f.o.b.) — of which (Millions of U.S. dollars): - Capital goods 152.7 275.5 278.6 351.2 278.6 443.7 332.0 274.4 306.1 339.7 - Energy goods 87.2 121.1 169.5 213.8 233.2 254.5 282.4 307.3 330.2 356.8 - Trade balance (Millions of U.S. dollars) -404.4 -613.0 -832.3 -906.4 -861.1 -1,086.7 -948.5 -904.8 -942.7 -996.5 - Services (net) (Millions of U.S. dollars) -123.2 -100.6 -178.5 -214.1 -179.6 -191.4 -129.5 -66.8 -23.7 31.3 - Tourism receipts (Millions of U.S. dollars) 151.6 186.0 174.5 205.9 186.0 213.9 246.0 282.9 325.3 374.1 - Current transfers (net) (Millions of U.S. dollars) 461.3 518.6 604.0 728.5 695.7 777.4 722.5 717.2 734.4 745.3 - Private remittance inflows (Millions of U.S. dollars) 98.5 63.3 88.3 88.1 98.8 95.5 100.2 105.4 115.7 127.5 - Public (incl. HIPC grants) (Millions of U.S. dollars) 362.5 446.0 524.3 646.4 599.7 682.4 633.8 624.7 627.5 622.0 - Current account balance (incl. official transfers) (Millions of U.S. dollars) -83.4 -230.1 -443.6 -450.5 -380.8 -555.1 -429.5 -336.4 -309.6 -290.6 - Capital and financial account balance (Millions of U.S. dollars) 196.7 316.1 512.2 454.0 371.4 585.8 418.9 338.9 353.2 339.4 - SDR allocation: 100.7 (note in table) - Gross official reserves (including SDR allocation) (Millions of U.S. dollars) 552.4 596.4 742.2 744.3 737.2 767.3 755.7 756.4 797.6 843.6 ### Central Government operations — fiscal figures (Table 4: Operations of the Central Government, fiscal year basis) - Fiscal aggregates (Billions of Rwandan francs) - Revenue and grants 388.0 518.2 670.7 779.6 800.7 825.4 966.7 1,077.0 1,177.2 1,286.5 - Total revenue 233.2 290.3 413.0 385.1 391.4 471.1 536.0 626.7 719.3 815.7 - Tax revenue 217.6 272.4 361.4 369.3 376.4 449.1 508.9 591.6 679.9 771.7 - Direct taxes 73.6 103.3 130.1 144.5 148.8 175.8 199.4 231.5 269.4 307.3 - Taxes on goods and services 109.8 135.0 179.3 191.2 195.0 234.3 265.4 308.3 355.6 403.7 - Grants 154.8 227.9 257.7 394.5 409.3 354.3 430.7 450.3 458.0 470.7 - Total expenditure and net lending 414.2 521.8 731.2 814.9 804.2 949.2 1,028.1 1,105.7 1,197.6 1,306.8 - Current expenditure 266.5 349.0 401.7 467.7 459.2 514.2 602.8 685.1 767.4 856.2 - Capital expenditure 131.8 188.2 306.6 308.8 316.7 402.8 404.0 398.3 415.3 440.9 - Balances - Primary balance -29.5 -77.1 -62.2 -167.0 -160.8 -185.6 -195.2 -207.2 -216.9 -221.6 - Domestic fiscal balance -87.5 -128.5 -147.2 -268.7 -250.7 -293.9 -293.9 -306.3 -311.1 -320.2 - Overall deficit (payment order) After grants -26.1 -3.6 -60.5 -35.4 -3.5 -123.8 -61.4 -28.7 -20.3 -20.3 - Overall deficit (payment order) Before grants -180.9 -231.6 -318.1 -429.9 -412.8 -478.1 -492.1 -479.0 -478.3 -491.0 - Financing (Billions of Rwandan francs) - Foreign financing (net) 39.2 42.8 72.5 24.7 26.1 54.8 69.4 36.7 28.2 28.1 - Drawings 44.7 47.9 77.0 30.0 31.1 62.9 79.5 49.1 41.8 42.5 - Net domestic financing 2.1 -31.5 -3.1 19.0 -11.4 80.1 0.0 0.0 0.1 0.2 ### Fiscal operations (percent of fiscal year GDP) — selected ratios (Table 4 continued) - Total revenue 12.4 12.6 14.9 12.2 12.5 13.6 13.7 14.3 14.6 14.8 - Total expenditure and net lending 22.0 22.6 26.4 25.9 25.8 27.3 26.4 25.2 24.4 23.7 - Primary balance -1.6 -3.3 -2.2 -5.3 -5.2 -5.3 -5.0 -4.7 -4.4 -4.0 - Domestic fiscal balance -4.6 -5.6 -5.3 -8.5 -8.0 -8.5 -7.5 -7.0 -6.3 -5.8 - Overall deficit (payment order) After grants -1.4 -0.2 -2.2 -1.1 -0.1 -3.6 -1.6 -0.7 -0.4 -0.4 - Financing: Foreign financing (net) 2.1 1.9 2.6 0.8 0.8 1.6 1.8 0.8 0.6 0.5 ### Monetary survey and reserves (Table 5: Monetary Survey, 2006–13) - Monetary aggregates (Billions of Rwanda francs) - Net Foreign Assets (monetary authorities) 225.0 281.8 325.6 272.2 312.6 344.5 358.0 322.6 384.7 369.3 390.5 ... - Reserve money 71.8 93.9 116.0 113.7 109.6 115.0 116.4 116.6 118.9 122.5 125.7 ... - Broad money 287.0 375.2 466.1 432.9 436.8 467.5 527.1 504.4 556.5 565.9 590.0 ... - Currency in circulation 54.6 67.3 80.9 66.3 72.1 69.4 77.0 68.4 83.5 85.3 81.8 ... - Deposits 232.3 307.9 385.2 366.6 364.7 398.0 450.1 436.0 473.1 480.6 508.2 ... - Growth rates and ratios - Broad money annual growth 31.3 30.8 24.2 19.0 17.6 17.1 13.1 16.5 27.4 29.6 12.9 ... - Reserve money annual growth 11.9 30.7 23.5 3.3 -2.5 -0.8 0.3 4.0 8.4 6.1 14.6 ... - Currency/broad money ratio 19.0 17.9 17.4 15.3 16.5 14.9 14.6 13.6 15.0 15.1 13.9 ... - Net open position of the NBR (RF billion) 219.1 275.6 317.9 266.8 306.6 337.8 351.3 322.6 396.4 365.1 386.2 ... - Memorandum: - Nominal GDP (RF billion) 1,716.3 2,049.3 2,565.3 2,964.0 2,964.0 2,964.0 3,278.3 3,278.3 3,671.7 4,130.6 4,638.7 ### Financial soundness indicators for banking sector (Table 6, 2006–2010) - Capital adequacy and solvency - Solvency ratio 13.7 16.6 15.1 18.0 15.9 19.1 19.3 20.5 19.0 18.1 17.6 20.3 - Off balance sheet items/Total qualifying capital 334.8 305.6 221.7 205.9 210.2 182.5 160.7 164.0 184.1 197.6 224.4 202.9 - Asset quality - NPLs / Gross Loans 25.0 18.1 12.2 12.0 12.6 13.8 13.4 13.6 13.1 12.5 12.2 12.4 - Provisions / NPLs 83.5 67.0 78.1 75.5 66.3 67.6 70.9 65.9 55.2 57.2 56.8 56.4 - Profitability - Return on Average Assets 2.4 1.5 4.9 2.7 2.4 1.6 0.9 1.0 0.7 -0.2 1.3 2.5 - Return on Average Equity 27.0 15.5 10.8 21.9 18.5 11.4 6.4 7.0 5.0 -1.4 10.3 18.7 - Net Interest Margin 8.0 5.2 10.1 8.9 9.5 10.3 10.2 9.9 9.1 9.6 8.8 13.3 - Liquidity and market sensitivity - Liquid Assets / Total Deposits 64.7 76.4 54.0 60.4 61.1 65.4 59.3 61.7 65.3 51.7 58.4 47.9 - Gross loans/Total deposits 71.1 63.3 81.0 76.2 87.8 88.6 82.8 76.1 73.9 74.0 71.6 69.2 - Forex Exposure / Core Capital 9.0 8.7 2.6 -5.2 -4.6 0.6 5.9 0.8 1.9 4.9 1.5 2.4 *Source: Rwandan authorities; National Bank of Rwanda (NBR); World Development Indicators; and IMF staff estimates and projections.* ### APPENDIX I ### _cr1119 - APPENDIX I ### Context and program status - Letter of Intent dated December 4, 2010, Kigali, Rwanda, requesting completion of the first review of the three-year Policy Support Instrument (PSI) approved by the IMF Executive Board on June 17, 2010. The PSI will expire on June 29, 2013. - All quantitative assessment criteria and structural benchmarks under the PSI for end-June 2010 were met, except: - The indicative target on consolidated domestic debt of the public sector at end-June 2010 was missed after issuance of Treasury bills to ease tight cash flow caused by late donor disbursements; debt expected to be repaid as donor funds have been disbursed. - Government requests modifications to the Assessment Criteria for end-December 2010 to reflect operational realities (detailed in the attached TMU). Requested changes include: - Modifications to the adjusters on net foreign assets (NFA) of the central bank and net domestic financing (NDF) to keep pace with delays in donor grants. - Modifications to the definition of reserve money targets to align with seasonalities in currency in circulation. - Modifications to consolidated domestic debt limit to exclude debt issued by the central bank for monetary policy purposes. - Modifications to exclude one state-owned bank (Banque de Kigali (BK)) from the debt limit under the PSI to allow it to borrow on non-concessional terms for on-lending to small- and-medium size firms. - Government request to exclude Banque Rwandaise de Développement (BRD) from the debt limit was assessed and not accepted by Fund staff; government requests reconsideration in forthcoming review. ### Macro performance and outlook - Growth: - Real GDP growth is projected at 6.5 percent in 2010. - Growth led by agriculture (food crops benefiting from fertilizer, improved seeds, and extension services under Crops Intensification Program), manufacturing (food processing), electricity/gas/water, and construction; services recovery driven by finance and insurance, communications, tourism, and trade. - Inflation: - Overall inflation dropped from 5.7 percent in December 2009 to 1.5 percent in September 2010. - Inflation is expected to be below 5 percent at end-2010, below the 7 percent projection for the year. - Fiscal performance (FY2009/10 and Q1 2010/11): - 2009/10 overall fiscal deficit (including grants) was smaller than expected by 2.8 percent of GDP due to higher revenues and lower spending. - Domestic revenue collections exceeded projections by about 0.7 percent of GDP (driven by one-off collections of new motor vehicle registration tax). - Total spending was lower by about 2.2 percent of GDP due to lower spending on foreign-financed capital projects. - In Q1 2010/11 (July–September), trade taxes and non-tax revenues fell short of projections owing to larger-than-expected shift in imports from EAC and COMESA, contributing to a build-up of arrears despite lower-than-programmed spending. - Delays in World Bank external budget support grants in Q1 2010/11 led to short-term financing gap financed by issuance of short-term debt to commercial banks; contributed to exceeding the stock of domestic debt target at end-June 2010. - External sector: - Balance of payments expected to end 2010 with a small deficit; reserves coverage would be 4.6 months of imports. - Exports: combined coffee and tea exports expected to increase by about 40 percent compared to 2009. - Imports in 2010 would increase by about 20 percent compared to 2009 (driven by higher imports of energy, intermediate, and consumer goods). - Current account deficit including grants would be about 7 percent of GDP in 2010 (against 7.9 percent of GDP programmed). - Share of imports from EAC countries increased to 32 percent in January–June 2010 versus 26 percent in same period 2009 and 25 percent in 2008. - Some large project financing and foreign investment components have been pushed to 2011. ### Monetary policy, liquidity, and exchange rate - Monetary stance and liquidity: - NBR maintained an accommodative monetary policy stance; policy (repo) rate cut cumulatively by 200 basis points since November 2009. - Growth in credit to private sector forecasted to increase by about 10 percent by end 2010, below the initially projected 20 percent growth. - Exchange rate: - Introduction of exchange rate corridor framework in July 2010 as transitional measure toward market-based exchange rate. - Rwandan franc depreciated by 3 percent against the US dollar between April and August 2010. ### Financial sector and supervision - Banking system indicators as of June 30, 2010: - Capital adequacy ratio of the banking system: 17.6 percent. - Regulatory capital requirements: 10 percent for Tier 1 capital and 15 percent for total capital. - Nonperforming loans (NPL): decreased from 13.1 percent in December 2009 to 12.2 percent at end June 2010. - Return on equity: increased from 6.4 percent to 10.3 percent (June 30, 2009 to June 30, 2010). - Return on assets: increased from 0.9 percent to 1.3 percent (June 30, 2009 to June 30, 2010). - Supervisory and regulatory developments: - Six on-site bank inspections planned in 2010; 4 completed by September 2010. - Four banking regulations approved by September 2010, including loan classification and provisioning. - Law on credit information system passed by Parliament in May 2010; private credit bureau CRB Africa licensed in May 2010 and launched in July 2010. - NBR strengthened supervision of microfinance institutions (MFIs) and non-bank financial institutions (NBFIs); insurance regulations published in Official Gazette in September 2010 and remaining regulations to be published by end-December 2010. - Non-bank supervision conducted onsite inspection of Caisse Sociale du Rwanda (CSR) in October 2010. ### Payments, securities, and legal infrastructure - Payments systems and ICT: - Functional Specifications for Automated Transfer System (ATS) approved; hardware and software received and tested by BNR. - Backup site tested; interim Disaster Recovery site at Rwanda Development Board IT data centre accepted and tested. - First phase of Rwanda Integrated Payments Processing System (RIPPS) software received, customized, and acceptance tested; complete system scheduled to be operational by end June 2011. - Legal framework: - Electronic Transactions Law and Central Securities Law published in the Official Gazette in May 2010. - Regulations on Electronic Funds transfers, Electronic money, and payments and securities systems passed by BNR board and awaiting publication in Official Gazette by end-December 2010. - Guidelines on card operations and an oversight framework are being drafted. ### EDPRS implementation and structural reforms - EDPRS 2008–12 alignment: - Government remains committed to EDPRS and Vision 2020; cooperation with IMF under the PSI supports EDPRS strategies. - EDPRS implementation progress (through end-2009): - Out of 383 policy actions assessed, 374 implemented (implementation rate >97 percent). - Infrastructure: national roads in good condition increased to 53.8 percent from baseline 11 percent in 2006. - Electricity generation capacity increased from 45MW to 84MW; number of connections increased by 75 percent. - Progress on MDGs: on track to achieve health and education-related MDGs; MDGs related to gender equality achieved; progress in water and sanitation access. - Governance: progress in public financial management, justice, decentralization, and citizen participation. - Structural benchmarks: - All structural benchmarks for July–September met except submission of export diversification strategy to Cabinet; draft available by August but submission delayed to end-January 2011 pending stakeholder comments. - Submission to Cabinet of medium-term debt strategy planned for end-January due to delays in hiring consultants. *Source: APPENDIX I — Letter of Intent and Memorandum on Economic and Financial Policies, Rwanda, December 4, 2010.* ### 18. Efforts to improve the quality of national accounts are continuing. In October 2010, ### _cr1119 - 18. Efforts to improve the quality of national accounts are continuing. In October 2010, ### National accounts and statistics - In October 2010, the NISR disseminated quarterly GDP estimates for the first and second quarters of 2010, together with minor revisions of GDP estimates for 2008 and 2009. - The NISR finalized the design of the Living Standards Measurement Questionnaire (EICV) as committed by the end-September structural benchmark. - The 2010 household survey incorporating the finalized questionnaire is to be conducted from November 2010 to October 2011. - Progress made revising methodology for ex-ante and ex-post agricultural crop assessments (to be finalized by end-Dec 2010). - Starting with the 2011 season A crop, the NISR will use the preliminary revised ex-ante survey and will follow up with ex-post agricultural crop assessments starting with the season A crop. - NISR will update GDDS metadata and submit it to the IMF for posting by the end of March 2011. - NISR will hire economists to ensure consistency of national accounts statistics with macroeconomic developments. - Structural benchmark: begin conducting ex-post crop assessments starting with the 2011 agricultural A season (SB end January 2011). ### Macroeconomic objectives and inflation - Overriding objective: sustain real GDP growth rates above 7 percent per year. - Inflation target: 6 percent for end-2011 and stabilizing at 5 percent over the medium-term. - NBR projects inflation at 4.6 percent in 2010. - NBR projects inflation to pick up to about 6 percent in 2011, return to 5 percent in 2012 and stabilize at that rate over the medium-term. - Risks to inflation: exogenous shocks, including food and fuel prices. ### Fiscal policy (2010/2011 and medium term) - Revised 2010/2011 budget: adjusted for lower revenues offset by expenditure cuts, overall fiscal balance (including grants) unchanged. Revised budget to be submitted to Parliament before end-2010. - Original targeted increase in domestic revenue mobilization: about 1.4% of GDP; revised program target: 1.1 percent of GDP. - Expected total collections lower by about Rwf 8.5 billion (0.2 percent of GDP) due to slower recovery, revenue loss from trade with the EAC and COMESA region, and poor profit tax performance. - Authorities will request an FAD mission from the IMF to review tax policy. Planned additional revenue measures for 2010/11: - Increase the number of taxpayers by 10 percent from 42,538 (end June 2010) through end June 2011 via collecting pension funds and using the Block Management System to boost Income and VAT tax collections. - Intensify enforcement to avoid aging of arrears and recover collectible ones amounting to Rwf 8 billion by June 2011 compared to Rwf 6.5 billion in the PSI program. - Start using risk-based audit planning, targeting high risk sectors, prioritizing audits to ensure all large and half of the medium taxpayer sectors are current in audit by end 2011. Contingency and expenditure adjustments: - To offset expected revenue shortfall, authorities expect compensation from the EAC-Comesa Fund for revenue losses for 2009/10 (US$ 14 million or about Rwf 8 billion). - If compensation is not realized, the revised 2010/11 budget will include identified contingent expenditure cuts in non-priority areas amounting to 0.2 percent of GDP. Proposed expenditure cuts (2010/11 BUDGET, in billion Rfw): - A Goods and Services: Approved 42.2; Amount to be Cut 4.0; Share of GDP 0.1 - B Transfers: Approved 40.6; Amount to be Cut 5.4; Share of GDP 0.2 - C Domestic Capital Expenditure: Approved 4.1; Amount to be Cut 3.3; Share of GDP 0.09 - GRAND TOTAL: Approved 86.9; Amount to be Cut 12.7; Share of GDP 0.4 Domestic debt and financing: - Temporary shortfall in official external budget support grants will be financed with short term debt instruments, increasing domestic debt. - Stock of domestic debt (excluding T-bills issued for monetary policy purposes) expected at Rwf 212.1 billion at end of fiscal year 2010/2011 compared to Rwf 177.8 billion at end 2009. - Medium-term revenue objective: increase revenue from 12.5 percent of GDP in 2009/10 to 14.3 percent of GDP by 2012/13 (as estimated in the PSI program). Fiscal transparency and risk management: - Before granting tax exemptions for export development strategy and PPPs, government will carefully assess fiscal risks; new tax incentives to be fully transparent in tax codes and investment codes. - MINECOFIN to strengthen capacity to assess revenue losses of tax exemptions for possible inclusion in annual budget documents. - Government will ensure fiscal risks of proposed PPPs are assessed early by MINECOFIN before decisions. - Government committed to submit medium-term debt strategy to Cabinet. - Improve communication strategy: prepare quarterly budget execution reports and publish on website within 45 days from end of each quarter (continuous structural benchmark). Reports to include central government operation table and analysis of fiscal outturns versus annual fiscal objectives; move toward bi-annual reports analyzing fiscal developments versus medium-term objectives. Public Financial Management: - PEFA assessment near completion. Preliminary 2010 scores improved significantly from 2007: “A” scores increased by more than 300 percent; “D” scores declined by 45 percent. - Improvements underpinned by clear legal framework for budget preparation and legislative scrutiny, and improved compliance and oversight across PFM cycle. ### External sector policies - External current account deficit (excluding grants) estimated at about 7 percent of GDP at end 2010; expected to widen in 2011 to about 9.5 percent of GDP before declining slightly in the medium term. - Higher imports in 2011 due to capital equipment for strategic investment projects and consumer goods from EAC and COMESA. - Total export receipts (US dollar terms) in the medium term projected to rise slower than originally projected in the PSI program due to expected sluggish world commodity prices for coffee, tea and minerals. - Balance of payments projected to close in medium term with small deficits financed with some draw down of international reserves. - Gross official reserves expected to remain on average at a safe minimum coverage of 4 to 5 months of imports. Debt management and nonconcessional borrowing: - Explore concessional financing avenues; some non concessional financing will be necessary given large development financing needs. - Agreed ceiling of US$240 million of non concessional borrowing during the PSI period for RwandAir and the Kigali Conference Center (KCC). - Two state owned banks (Bank of Kigali and Banque Rwandaise de Developpement) negotiating non-concessional lines of credit amounting to about US$55 million with AfDB and AFD for on-lending to SMEs and mitigating asset-liability mismatch. - Authorities request exclusion of these banks from the DSA definition, asserting they do not pose fiscal risk to Central Government budget. ### Monetary and exchange rate policies - NBR to maintain current accommodative monetary policy stance, reassessing regularly to ensure inflationary pressures are anchored. - NBR to ensure real interest rates are kept positive to stimulate domestic savings mobilization and support financial deepening. - Broad money growth: estimated about 13 percent in 2010; projected about 13.8 percent in 2011. - Credit to private sector: estimated 11 percent in 2010; projected about 22.4 percent in 2011. - NBR will use reserve money targeting and sale of foreign exchange to banks to manage liquidity and maintain low inflation while supporting growth. - With IMF TA, NBR to further reform foreign exchange rate market toward greater flexibility and encourage development of foreign exchange interbank market. - NBR will monitor Rwf exchange rate vis-a- vis currencies of major trading partners to limit volatility of the real effective exchange rate. - Structural benchmark: eliminate Average Reference Rate (ARR) by end January 2011; operate with new buying and selling customer rates as margins on previous day’s closing market rate. For official accounting, use mid-point of NBR customer buying and selling spread. - NBR to strengthen economic analysis capacity with IMF MCM TA and train economists in: (i) modeling inflation for policy simulations; (ii) analyze and forecast balance of payments developments; (iii) assess fundamentals to determine interventions and re-base exchange rate corridor. ### Financial sector reforms and inclusion - NBR to promulgate laws to strengthen financial sector regulation: - Pension law expected to come into effect by end-March 2011. - New insurance contract law approved by NBR Board in September 2010. - Mandatory insurance law in drafting; expected to be passed by Parliament before end 2011. - Law governing collective investment schemes (CIS) expected to be passed by end 2010. - Two other CMA draft laws expected to be passed by Parliament before end 2010. - NBR developing an action plan to revamp staff capacity, particularly supervision department; submit action plan to Board by end-March 2011 to improve compensation and professional development. - NBR conducting a salary survey to be completed by end-March 2011. - Banking Supervision Department implementing 2010 supervision program with EAC senior bank examiners; expects TA from IMF and World Bank in 2011–2012. - NBR has 2010–2011 comprehensive training program funded by AfDB including attachments and in-country workshops; aims to achieve at least 6 on-site inspections in 2010 with NBR staff (structural benchmark end-December 2010). - Government requested FSAP update planned for early 2011 to advise on financial inclusion expansion while limiting vulnerabilities; FSDP to be revised incorporating FSAP recommendations. - NBR strengthening supervision of rapid expansion of MFIs, including some 416 UMURENGA SACCOs, using Risk Based Supervision in some large MFIs by December 2011. - Policy objective: reach 30 percent financial inclusion by 2012, up from 21 percent cited by Finscope Rwanda 2008 survey. ### Quantitative assessment highlights (selected figures from Table 1) - Net foreign assets of the NBR at program exchange rate (floor on stock): Sep 369.3; Dec 368.2; March 384.7; status met; June 390.5; Prog Adjusted 352.6; Est 353.2; Status 318.9. - Reserve money (ceiling on stock): Sep 122.5; Dec 122.5; March 121.7; status met; June 126.2; Prog Adjusted 129.9; Est 132.1; Status 135.8. - Net domestic financing (ceiling on flow): Sep -7.5; Dec -6.3; March -11.2; status met; June -26.3; Prog Adjusted 22.7; Est 39.1; Status 68.9. - New nonconcessional and government guaranteed external debt (US$ Millions) (ceiling on stock): 240.0 (Sep, Dec, March) met; June 240.0; adjusted 240.0; Est 240.0; Status 240.0. - External payment arrears (US$ Millions) (ceiling on stock): 0.0 across reporting dates; status met. - Indicative target — Domestic revenue collection (floor on flow): Sep 197.9; Dec 197.9; March 204.3; status met; June 313.2; Prog Adjusted 424.0; Est 552.2; Status 675.4. - Net accumulation of domestic arrears (ceiling on flow): Sep -3.0; Dec -3.0; March -6.1; status met; June 4.8; Prog Adjusted -13.1; Est -15.1; Status -17.1. - Consolidated domestic debt of public sector (ceiling on stock, eop): Sep 211.1; Dec 212.3; March 264.8; not met; June 178.4; Prog Adjusted 219.0; Est 206.1; Status 212.1. - Total priority spending (floor on flow): Sep 212.0; Dec 212.0; March 228.7; status met; June 342.7; Prog Adjusted 458.7; Est 573.7; Status 688.8. - Memorandum item — General budget grants (US$ Millions): Sep 218.2; Dec 218.2; March 216.1; June 330.6; Prog Adjusted 418.0; Est 509.9; Status 541.7. - Program exchange rate used for 2010 and 2011: RWF 571.24 per US dollar. ### Policy timetable and benchmarks - Structural benchmarks and target dates: - NISR finalize revised methodology for ex-ante and ex-post agricultural crop assessments by end-Dec 2010 (structural benchmark). - NISR to begin ex-post crop assessments starting with 2011 A season (SB end January 2011). - NISR to submit GDDS metadata to IMF by end of March 2011. - NBR to eliminate Average Reference Rate (ARR) by end January 2011 (structural benchmark). - NBR action plan on compensation and professional development to Board by end-March 2011; salary survey completed by end-March 2011. - PFM1: Strengthen the MTEF by completing PERs for two more sectors (ICT and transportation) — target End March 2011. *Source: Rwandan authorities and IMF staff estimates and projections as presented in the provided content.* ### 2. Begin pilot of core modules of Smartgov (a component of IFMIS) in Ministries and Agencies. ### _cr1119 - 2. Begin pilot of core modules of Smartgov (a component of IFMIS) in Ministries and Agencies. ### Structural benchmarks and implementation status (2010/11) - 2. Begin pilot of core modules of Smartgov (a component of IFMIS) in Ministries and Agencies. - End July 2010 - Purpose: To help budget preparation, reporting and execution. - Status: Met - 3. Submit to Cabinet for approval a revised public debt policy and MTDS. - End January 2011 - Purpose: To assess costs and benefits of scaled-up nonconcessional financing and analyze fiscal risks associated with PPPs. - Note: Changed to end January 2011 from end December 2010 owing to delays in hiring a consultant to further refine the draft strategy. - Fiscal Performance - 4. MINECOFIN to publish (and put on its website) quarterly reports of budget execution against annual fiscal policy objectives, within 45 days of end of each quarter. - Continuous, starting mid-May 2011 - Note: Initially the quarterly budget execution reports will exclude foreign-financed projects. - Purpose: To improve communication of fiscal performance to stakeholders. - Revenue Administration - 5. Submit to Cabinet for approval draft legislation to transfer collection and audit functions of social security contributions (pension and RAMA) to RRA. - End December 2010 - Purpose: To improve compliance and widen the tax base. - 6. Improve risk-based assessment of ASYCUDA++ by electronic submission of supporting customs documents. - End June 2010 - Purpose: To modernize customs collection and properly assess liabilities. - Status: Met - Financial Sector - 7. NBR to conduct minimum of 6 on-site bank inspections with NBR staff. - End December 2010 - Purpose: To keep up with both on and off site prudential oversight of banks consistent with risk-based supervision framework. - Status: Progress to be reviewed - Monetary Policy - 8. NBR to publish (and put on its website) the underlying economic assessments supporting MPC decisions within one month after every quarterly MPC meeting. - Start date - End June 2010 - Purpose: To improve communication and shape expectations of market and general public and enhance effectiveness of the monetary policy framework. - Status: Met - Exchange Rate - 9. Announce the introduction of interbank exchange rate corridor framework. - End June 2010 - Purpose: To improve foreign exchange market efficiency and allow exchange rates to move in line with fundamentals. - Status: Met - 10. Remove NBR's Average Reference Rate (ARR) and establish new NBR customer buying and selling exchange rates. - End January 2011 - Purpose: Unifying official and customer exchange rate. - Export sector - 11. Submit to cabinet for approval the draft export diversification strategy and action plan. - End August 2010 - Purpose: To broaden the export base. - Status: not met; To be implemented by end January 2011 to allow more time to incorporate further review by stakeholders. - Statistics - 12. Finalize design of living standards measurement questionnaire (EICV). - End September 2010 - Purpose: To improve measurement of GDP growth. - Status: Met - 13. Revise methodology for conducting ex-ante and ex-post agricultural crop assessment. - End December 2010 - Purpose: To improve measurement of GDP growth. - Status: Progress to be reviewed - 14. Conduct ex-post crop assessment of 2011 season A. - End January 2011 - Purpose: To improve measurement of GDP growth. ### Technical Memorandum of Understanding — scope and assessment framework - Coverage period defined: June 30, 2010–June 30, 2013 (TMU supersedes prior TMU). - Program assessment instruments: - Assessment criteria (AC) and indicative targets (IT) for the program duration. - AC apply to the following indicators for end-June and end-December test dates; other dates are IT: - Floor on stock of net foreign assets (NFA) of the National Bank of Rwanda (NBR); - Ceiling on stock of reserve money; - Ceiling on flow net domestic financing (NDF) of the central government; - Ceiling on contracting or guaranteeing of new nonconcessional external debt by the public sector; - Ceiling on stock of external payment arrears of the public sector. - IT targets apply to the following indicators: - Floor on flow domestic revenue collection of the central government; - Ceiling on flow net accumulation of domestic arrears of the central government; - Ceiling on stock of consolidated domestic debt of the public sector; - Floor on flow priority spending. - Continuous applicability: Assessment criteria on contracting or guaranteeing of new nonconcessional external debt by the public sector and stock of external payment arrears of the public sector are applicable on a continuous basis for the duration of the program. ### Program exchange rates (accounting purposes) - Program exchange rates (US$ per currency unit, unless indicated otherwise) — end-December 2009 rates applied for 2010 and 2011: - Rwanda Franc (per US$) 571.24 - Euro 1.4599 - British pound 1.6241 - Japanese Yen (per US$) 89.5610 - SDR 1.5822 ### Fiscal sector institutional coverage and key definitions - Institutional coverage: - Central government fiscal operation table comprises the treasury and line ministries (referred to as the government). - Ceiling on net domestic financing (NDF) of the government: - Measurement: Cumulatively from December 31, 2009 for June 30, 2010; December 31, 2010; and June 30, 2011. Other dates are indicative targets. - Definition: NDF is change in the sum of (i) net banking sector credit to the government and (ii) non-bank holdings of the government domestic debt. - Net banking sector credit to the government defined as: - Credit to the government from the banking system (as recorded in the monetary survey), including credit to the government, provinces and districts, outstanding consolidated government debt held by the banking system, government debt to the NBR incurred as a result of the 1995 devaluation (Rwf 9 billion), the overdraft to the prewar government (Rwf 2 billion), and overdraft with the NBR. - Exclusions: Treasury bills issued for monetary policy purposes by the NBR (proceeds sterilized); government deposits over which the central government does not have direct control (project accounts, counterpart funds, fonds publics affectés). - Non-bank holdings of government domestic debt: - Consists of non-bank holdings of treasury bills, bonds (domestic and nonresident), old development bonds (pre-1994 debt), new development bonds (including those used for recapitalization of banks), and other accounts receivables. ### Adjusters and reporting for NDF and related fiscal items - NDF adjusters: - Ceiling on NDF will be adjusted upward by the amount of any shortfall between actual and programmed budgetary grants (defined in Table 2 of Quantitative AC and IT), up to a maximum adjustment of US$80 million, evaluated in Rwanda francs at the program exchange rate. - The ceiling will be adjusted downward by the amount of any excess of actual over programmed budgetary grants above US$24 million, evaluated in Rwanda francs at the program exchange rate. - The ceiling on NDF will be adjusted upward by the amount of expenditure for food imports in the case of a food emergency. - Reporting requirement for NDF: - Data on NDF (showing separately treasury bills and government bonds outstanding, other government debt, and central government deposits), each type of debt by debt holder, and its adjusters transmitted on a monthly basis within five weeks from the end of each month. - Government deposits with the NBR and with commercial banks to be separated from deposits of public enterprises and autonomous public agencies not under direct government control. - Domestic revenues: - Definition: Floor on domestic government revenue defined as total government revenue (tax and non-tax revenues) per the central government fiscal operation table, but excluding external grants, and privatization receipts. - Reporting: Detailed data on domestic revenues transmitted monthly within five weeks of the end of each month. - Floor on priority expenditure: - Measurement: Cumulatively from December 31, 2009. - Definition: Priority spending = sum of recurrent expenditures, domestically-financed capital expenditures, and net lending identified as priority in line with the EDPRS; monitored through SIBET expenditure management system at the program level. - Reporting: Data on priority expenditure transmitted monthly within five weeks of the end of each month. - Net accumulation of domestic arrears: - Ceiling applies measured cumulatively from December 31, 2009. - Definition: Net accumulation of arrears = gross accumulation of new domestic arrears (difference between payment orders and actual payments related to payment orders issued) minus gross repayment of any arrears outstanding on December 31, 2009 (including repayment of float in 2009 and repayment of older arrears). - Reporting: Data on repayment of domestic arrears and remaining previous-year stock of arrears transmitted monthly within five weeks of the end of each month. ### Limits and definitions for external debt and arrears - Ceiling on contracting or guaranteeing of new nonconcessional external debt by the public sector: - Applies continuously from end-June 2010 to end-June 2013 (see Table 2 of the MEFP for amounts). - Exclusions: swap agreement of US$50 million signed in November 2009 between the NBR and the IFC and US$13.1 million for purchase of two air planes in 2009; nonconcessional borrowing by the Bank of Kigali (assumed not to seek or be granted a government guarantee). - Also applies to private debt for which official guarantees have been extended. - Definition of the public sector for program purposes: - General government (central government, NBR, local governments including provinces and districts) and entities in which the government holds a controlling stake (owning more than 50 percent of the shares or ability to determine general corporate policy). - Excludes the Bank of Kigali. - Guarantee of debt: - Arises from any explicit legal obligation of the public sector to service a debt in event of nonpayment by the debtor, or from any implicit legal or contractual obligation to finance partially or fully any shortfall incurred by the debtor. - Definition of concessionality: - Debt is concessional if it includes a grant element of at least 35 percent, calculated as: grant element = (nominal value − present value)/nominal value, with PV calculated by discounting debt service using currency-specific CIRRs published by OECD. - For debt maturity ≥ 15 years: ten-year-average CIRR used; for maturity < 15 years: six-month average CIRR used. - Margins to be added: 0.75 percent (repayment < 15 years), 1 percent (15 to 19 years), 1.15 percent (20 to 29 years), 1.25 percent (30 years or more). - Calculation to account for maturity, grace period, payment schedule, upfront commissions, and management fees. - Definition of debt (per Guidelines on Performance Criteria with Respect to External Debt, effective December 1, 2009): - Debt = current contractual liability requiring future payments of assets or services; primary forms include loans, suppliers' credits, and leases (present value of lease payments at inception). - Includes arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligation constituting debt. - Limit on stock of external payment arrears: - Continuous assessment criterion applies to non-accumulation of payment arrears on external debt contracted or guaranteed by the public sector. - External payment arrears consist of external debt service obligations (principal and interest) not paid when due, excluding arrears on obligations subject to rescheduling. ### Consolidated domestic debt of the public sector (DD) and reporting - DD definition and ceiling: - DD excludes treasury bills issued by the NBR for monetary policy purposes. - Ceiling applies to domestic commitments contracted or guaranteed by the public sector, including private debt with official guarantees. - Adjusters for DD: - In case of shortfall in programmed grants, ceiling on DD adjusted upward by same amount as NDF increase, capped per paragraph 12. - Ceiling on DD adjusted upward by amount of expenditure for food imports in case of a food emergency. - Reporting requirement: - Data on domestic debt of the public sector, including treasury bills issued by the NBR for monetary policy purposes, transmitted monthly within five weeks of the end of each month. ### Targets for monetary aggregates — Net foreign assets (NFA) of the NBR - Floor applies to NFA of the NBR for June 30, 2010; December 31, 2010; and June 30, 2011 targets. Other dates are indicative targets. - Definition: NFA of the NBR in Rwanda francs defined consistent with SDDS template as external assets readily available to or controlled by the NBR net of its external liabilities. - Pledged or otherwise encumbered reserve assets (including swaps) excluded (includes assets used as collateral or guarantee for third party external liabilities). - Foreign assets and liabilities in U.S. dollars converted to Rwanda francs using U.S. dollar/Rwanda franc program exchange rate. - Foreign assets and liabilities in other currencies converted to U.S. dollars using actual end-of-period U.S. dollar/currency exchange rate. - Foreign liabilities include use of IMF resources (CCFF and post-conflict emergency assistance purchases and SAF/ESAF/ECF disbursements). *Source: MEFP (June 2010, December 2010 Update) and staff assessment; Technical Memorandum of Understanding (December 4, 2010).* ### 32. Adjusters: ### 32. Adjusters ### Adjusters for Net Foreign Assets (NFA) - The floor on NFA will be adjusted downward by the amount of any shortfall between actual and programmed budgetary grants. This adjustment will be capped at the equivalent of US$80 million, evaluated in Rwanda francs at the program exchange rate. - In the case of excess of actual over programmed budgetary grants, the floor of the NFA remains unchanged for the first US$24 million. Subsequently, the floor will be adjusted upwards by any amount in excess of US$24 million. - The floor on NFA will be adjusted downward by the amount of expenditure for food imports in the case of a food emergency. ### Reporting requirement for NBR foreign assets and liabilities - Data on foreign assets and foreign liabilities of the NBR will be transmitted on a weekly basis within seven days of the end of each week. - Transmission will include daily and weekly data on the NBR’s foreign exchange liabilities to commercial banks (including required reserves with the NBR). - The exchange rate used for their conversion into Rwanda francs will be shown separately. ### Reserve money targets and definition - A ceiling applies to the stock of reserve money for the June 30, 2010, December 31, 2010 and June 30, 2011 targets. Other dates are indicative targets throughout the program. - The stock of reserve money target for a given quarter will be calculated as the arithmetic average of the stock of reserve money at the end of each calendar month in the quarter. - Daily average of all the three months in the quarter will constitute the actual reserve money to be compared with the target. - Reserve money is defined as the sum of currency in circulation, commercial banks’ reserves, and other nonbank deposits at the NBR. ### Adjuster for reserve money - The ceiling on the stock of reserve money will be adjusted symmetrically for a change in the required reserve ratio of commercial banks. - The adjustor will be calculated as (new reserve ratio minus program baseline reserve ratio) multiplied by actual amount of liabilities (Rwanda Franc plus foreign-currency denominated) in commercial banks. ### Reporting requirement for reserve money - Data on reserve money will be transmitted on a weekly basis within seven days of the end of each week. - Transmission will include a daily and a weekly balance sheet of the NBR which will show all items listed above in the definitions of reserve money. ### Other data reporting and communication requirements - For program monitoring, the Government of Rwanda will provide the data listed in Table 1: weekly data within seven days of the end of each week; monthly data within five weeks of the end of each month; annual data as available. - The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Rwanda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. - The authorities will similarly inform the IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the NBR, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities. - The authorities will furnish an official communication to the IMF describing program performance of quantitative and structural assessment criteria and benchmarks within 8 weeks of a test date. - The information should be mailed electronically to AFRRWA@IMF.ORG. --- ### APPENDIX II — RWANDA: SOURCES OF GROWTH USING A GROWTH ACCOUNTING FRAMEWORK ### Summary findings - Real GDP growth averaged about 8 percent a year during 1998-2009, up from 2 percent a year in the 1980s. - The contribution of TFP to output growth rose to 2.1 percent on average for 1998–2009. - For 2004-2009, capital and TFP each contributed 2.9 percent to output growth on average. - About 28 percent of output growth in Rwanda during 1998–2009 is derived from TFP gains, while only 13 percent of real GDP growth is attributable to TFP increases in the other EAC countries, on average. - Staff estimates that real GDP growth will reach 6.5 percent in 2010 (up from 4.1 percent in 2009), largely explained by improvement of TFP to 1.3 percent in 2010 after a negative contribution in 2009. ### Methodology and data (concise) - Uses a standard Cobb-Douglas production function with TFP A, capital K, labor L, and capital share α. - TFP is measured as a residual after accounting for capital and labor contributions. - Output Y (1960–2009) and investment (gross fixed capital formation) are taken from the IMF World Economic Outlook (WEO) database. - Initial capital-output ratio in 1960 assumed to be 1.5; capital depreciation assumed at 6 percent per year. - Labor force data from the World Bank Development Indicators; labor force growth for 2009 assumed 2.9 percent (average 2004–2008). - α is set at 0.4 (robustness check uses α = 0.3). ### Key quantitative results (selected periods) - Period 1961-2009: Real GDP Growth 3.9%; Physical Capital 1.4%; Labor 1.4%; TFP 0.4%. - Period 1961-1993: Real GDP Growth 2.7%; Physical Capital 1.3%; Labor 1.0%; TFP 0.2%. - Period 1998-2009: Real GDP Growth 7.6%; Physical Capital 2.3%; Labor 2.9%; TFP 2.1%. - Period 2004-2009: Real GDP Growth 7.8%; Physical Capital 2.9%; Labor 1.7%; TFP 2.9%. (Note: "Values do not exactly agree with the sum of the contributions from the three factors, due to approximation.") ### Medium-term projections and scenarios - Baseline projection: Output growth expected to peak at 7 percent in 2012, then stabilize at 6.5 percent. This path driven by government strategic investments and gradual rise in TFP projected to reach 2.2 percent in 2012 and remain at that level thereafter. - Potential (upside) scenario: Rwanda’s economy could potentially grow by 8.4 percent over the medium term provided: - (i) investment is scaled up to the level of global average (investment reaching 25 percent of GDP in 2015 versus staff projection of 20.6 percent of GDP by 2015); - (ii) productivity growth accelerates and remains elevated (TFP accelerates to 2.9 percent in 2013 and then stabilizes at that level); - (iii) there are no adverse shocks affecting output. ### Methodological caveats - TFP is measured as a residual and thus contains factors beyond pure efficiency gains, including external shocks, political stability, climate conditions, and measurement errors. - Labor inputs cannot be adjusted for quality of human capital and working hours due to lack of a labor force survey; improvements in human capital will be captured as part of measured productivity growth. *Source: _cr1119 - 32. Adjusters* ### 13. Mobilizing private resources through maintaining macroeconomic stability and ### 13. Mobilizing private resources through maintaining macroeconomic stability and pro-market structural reforms ### Growth potential and sources of growth - The investment-GDP ratio of 25 percent is much higher than the projected average of Sub-Saharan African countries, 21 percent in 2015, and is equivalent to the world average. - Rwanda’s economy could potentially grow by about 8.4 percent over the medium term, provided investment is scaled up and productivity growth accelerates and remains elevated. - Robust growth is expected to be maintained over the medium term, underpinned by public investment and enhanced productivity. - Growth of both output and productivity has significantly increased after 1998; the contributions of capital and productivity to growth have further increased in recent years. - Rwanda's growth has been driven more by productivity gains, compared to other East African countries. ### Conditions and assumptions for the “best case” scenario - To realize the best case scenario amid planned fiscal consolidation and a decline in external grants, it is essential that the government: - Maintains macroeconomic stability. - Accelerates market-friendly structural reforms to mobilize further private investment. - Aptly utilizes resources to enhance the productivity of the economy. - IMF staff projection / Best Case Scenario assumptions: - Investment/GDP is scaled up (Investment/GDP (RHS) shown in figure context). - TFP (productivity) growth accelerates and remains elevated (TFP Growth (LHS) noted). ### Policy recommendations - Maintain macroeconomic stability during fiscal consolidation to avoid undermining private investment. - Accelerate market-friendly structural reforms to mobilize private investment and improve resource allocation and productivity. - Scale up investment while ensuring productivity-enhancing use of resources. ### Selected institutional and program indicators (as presented) - Relations with the Fund and program context: - A three-year Policy Support Instrument (PSI) program was approved on June 16, 2010, with an effective date of June 30, 2010. - Quota and holdings (SDR Million; %Quota): - Quota 80.10 100.00 - Fund holdings of currency 80.11 100.02 - Reserve Tranche Position 0.00 0.00 - SDR Department (SDR Million; %Allocation): - Net cumulative allocation 76.82 100.00 - Holdings 83.47 108.65 - Outstanding Purchases and Loans (SDR Million; %Quota): - PRGF Arrangements 9.67 12.07 - Latest financial arrangements (PRGF; Date of Expiration; Amount Approved (SDR Million); Amount Drawn (SDR Million)): - PRGF June 12, 2006 — August 07, 2009 8.01 8.01 - PRGF August 12, 2002 — June 11, 2006 4.00 4.00 - PRGF June 24, 1998 — April 30, 2002 71.40 61.88 - Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: 0.06 0.40 0.68 1.14 1.60 - Charges/Interest: 0.00 0.02 0.02 0.02 - Total: 0.40 0.71 1.16 1.61 ### HIPC and MDRI implementation (as presented) - HIPC Initiative: - Decision point date Dec 2000; Assistance committed by all creditors (US$ million) 695.50 - Of which: IMF assistance (US$ million) 63.40 (SDR equivalent in millions) 46.79 - Completion point date Apr 2005 - Disbursement of IMF assistance (SDR million): - Assistance disbursed 46.79 - Interim assistance 14.45 - Completion point balance 32.34 - Additional disbursement of interest income 3.77 - Total disbursements 50.56 - MDRI: - MDRI-eligible debt (SDR Million) 52.74 - Financed by: MDRI Trust 20.19; Remaining HIPC resources 32.55 - Debt Relief by Facility (SDR million): Delivery Date January 2006 — GRA N/A PRGT 52.74 Total 52.74 ### Exchange rate and monetary policy framework (selected details) - As of November 9, 2010 the official exchange rate was RWF 591.80 per U.S. dollar. - Since January 2010, the Rwanda franc has gradually depreciated against the dollar in a 2 percent band. - Under the revised classification effective January 4, 2010, the de facto exchange rate arrangement was reclassified to a crawl-like arrangement from a stabilized arrangement; the de jure exchange rate arrangement is classified as floating. - The official exchange rate (Average Reference Rate, ARR) is calculated on a daily basis by the National Bank of Rwanda (NBR) as a 5-day moving average of (i) the exchange rate used for transactions between commercial banks and their customers and (ii) the exchange rate used by NBR with its customers. - From January 16, 2009 to January 11, 2010, ARR was calculated as the ten days weighted moving average. With effect from January 12, 2010, ARR changed to a 5 days moving average. - The NBR applies a margin of +/-0.6 percent to the previous days’ ARR to derive current day’s customer rate and ensures that the customer rate used for transactions with the government and market rates do not differ by more than 2%. - Since March 24, 2010, NBR introduced an exchange rate corridor framework. *International Monetary Fund — RWANDA: Staff Report for the 2010 Article IV Consultation, First Review Under the Policy Support Instrument, and Modification of Assessment Criteria — Informational Annex (Approved December 6, 2010).* ### Appendix II. Rwanda: Joint Bank-Fund Work Program ### Appendix II. Rwanda: Joint Bank-Fund Work Program ### June 2010–June 2011 — Overview - Title: Products/Activity; Timing of mission (if relevant); Expected delivery date ### Bank Work Program — A. Strategy and Analytical Work - Multi-Year Education Policy Analysis — December 2010 - Rwanda Capacity Filter – Sector Analysis — February 2011 - Support for Strengthening Rwandan Social Safety Nets — April 2011 - Sustainable Land Management — May 2011 - Financial Sector Assessment Program Update — June 2011 - Support for Civil Society Strengthening — June 2011 - Technical Assistance for Poverty Monitoring — June 2011 - Employment and Growth Policy Note — July 2011 - Social Risk Management of Climate — October 2011 - Technical Assistance for Public Expenditure Management — June 2012 ### Bank Work Program — B. Ongoing and New Projects - EAC Financial Sector Development and Regionalization Project — December 2010 - Economic Empowerment of Young Women — December 2010 - Poverty Reduction Support Grant -VII — February 2011 - Transport Sector Support — April 2011 - Third Community Living Standards Grant — March 2011 - Skills Development Project — March 2011 - Decentralization and Community Development — Ongoing - Public Sector Capacity Building Project — Ongoing - Second Rural Sector Support Project — Ongoing - Second Emergency Demobilization and Reintegration Project — Ongoing - Land Husbandry, Water harvesting and Hillside Irrigation — Ongoing - Rwanda Electricity Access Scale-up and Sector-wide approach Project — Ongoing - Sustainable Energy Development Project (GEF) — Ongoing - Integrated Management of Critical Ecosystem Project (GEF) — Ongoing - Poverty Reduction Support Grant -VI — Ongoing - E-Rwanda — Ongoing - Transport Sector Development — Ongoing - Competitiveness and Enterprise Project — Ongoing ### IMF Work Program — A. Missions - First Review Under the Policy Support Instrument — October 2010; December 2010 ### IMF Work Program — B. Analytical Work - Some Considerations in the Design of a Liquidity Supervision Framework for Banks in Rwanda — December 2010 - Understanding the Exchange Rate Pass-Through to Domestic Prices in the EAC Region: Implications for Prospects of Monetary Integration. — December 2010 - Estimating the behavioral Equilibrium Exchange Rate for the EAC Countries — December 2010 - Monetary Policy Transmission in EAC Countries — December 2010 ### IMF Work Program — C. Technical Assistance - Fiscal: Tax and customs administration; revenue forecasting and PFM, strengthen PPP Unit in MINECOFIN — Ongoing - Monetary: Monetary policy operations; bank liquidity; interbank markets in local currency and foreign exchange — Ongoing - Financial: Bank supervision — Ongoing - Statistics: National accounts and balance of payments — Ongoing ### II. Request for Work Program Inputs - Bank Request to Fund: Impact of the global economic crisis on key macro indicators and growth in Rwanda — Ongoing - Bank Request to Fund: Sharing macro-framework updates — As needed - Fund Request to Bank: Assessment of key infrastructure projects undertaken by the government. — As needed - Fund Request to Bank: Assessment of the PFM and public service reform program. — As needed ### III. Agreement on Joint Products - Public and External Debt Sustainability Analysis. — Completed - Collaborate together with other development partners on the annual review of general budget support. — Ongoing - Collaborate on PFM reform program. — Ongoing - Collaborate on financial sector reform program. — Ongoing *Appendix II. Rwanda: Joint Bank-Fund Work Program* ### 10. Real sector data are reported regularly for publication in International Finance ### 10. Real sector data are reported regularly for publication in International Finance Statistics (IFS) ### Real sector and labor data - Real sector data are reported regularly for publication in IFS, although with some lag, particularly for GDP estimates. - Data on employment and wages are not collected, except for the central government. ### Government Finance Statistics - Detailed monthly revenues and expenditures are reported to AFR with a lag of five to six weeks. - These data are compiled by the flash-reporting unit of The Ministry of Finance and Economic Planning (MINECOFIN). - A functional classification of government expenditure has been available since the 2003 budget. - Within the economic classification, expenditures on PRSP-designated “priority areas” are clearly identifiable. - Fiscal data do not capture capital expenditure consistently because capital projects (almost entirely externally financed) are mainly carried out by line ministries outside the regular budget process. - Compilation of data on external budgetary assistance as well as on external debt would benefit from strengthened coordination between the finance ministry and the central bank. - Efforts are underway to integrate the development budget into the normal budgetary procedures. - Fiscal data often exhibit discrepancies between deficit and financing estimates. To address these issues, authorities have made adjustments for: - changes in the balance of non-core government accounts; - changes in cash in vault at the revenue authority; - accounting errors; and - other factors. - No sub-annual data are reported to STA for publication in the IFS, and annual government finance statistics have not been reported for publication in the GFS Yearbook since 1993. ### Monetary and Financial Statistics - The balance sheet of the NBR and detailed data on money market transactions are transmitted to AFR on a weekly basis with a lag of one week. - The monetary survey and the consolidated balance sheet of commercial banks are transmitted on a monthly basis with a lag of about five weeks. - Detailed data on interbank money market transactions are provided upon request. - Reporting of monetary statistics to STA has been delayed during the migration to the Standardized Report Forms (SRFs) undertaken by the NBR; the interruption in reporting has been longer than initially planned due to scarcity of skilled staff. - An August 2007 STA mission found: - a new chart of accounts for commercial banks was enacted in 2005 and call report forms were improved to better reflect the Monetary and Financial Statistics Manual methodology; - data on the Union des banques populaires du Rwanda were included in the broad money survey beginning January 2004; - data on credit and savings cooperatives and other microfinance institutions are still not included in monetary statistics. ### External Sector Statistics - Balance of payments statistics are affected by weaknesses in source data (treatment of customs data and bank settlement reports). - The June 2003 multisector statistics mission recommended: - reorganizing data entry and production of external trade statistics, using ASYCUDA and Eurotrace software; - adapting survey forms sent to companies to the BPM5 methodology; - collaborating with Central Public Investments and External Finance Bureau (CEPEX) to obtain data on international and bilateral aid. - STA and AFRITAC follow-up missions occurred in January 2004, June 2005, October 2006, and June 2007. - Technical assistance resulted in significant improvements: - collection of data through direct surveys is well established (response rate satisfactory except for embassies); - many adjustments to customs data were introduced to improve coverage and valuation (June 2006 AFRITAC mission); - the NBR has started compiling BOP/IIP statistics in conformity with the BMP5 methodology; - annual balance of payments and IIP data through 2007 have been reported to STA for publication in the IFS and the Balance of Payments Statistics Yearbook. - NBR initiatives in 2009–10 to improve data coverage included: - a questionnaire on technical assistance related to NGOs; - a cross-border trade survey capturing information on trade transactions with neighboring countries not captured by the official customs system; - a revision of the estimates of participation of (non-)residents in import transportation services. - Remaining weaknesses: - treatment of bank settlement reports is not effective due to incomplete automation of declaration collection; - coverage of external aid remains a concern: CEPEX data do not include offshore payments, direct payments to contractors, and technical assistants, nor aid from important UN agencies and from certain countries; - only external aid registered in the Government budget is fully covered; - NGO survey coverage is insufficient. - Databases on external public debt are maintained by both MINECOFIN and the NBR. - A committee composed of staffs from the ministries of finance and economic planning, foreign affairs, and the NBR is responsible for collecting, harmonizing, and monitoring information on external public debt. ### Key findings and policy recommendations from Executive Board, PIN, and PSI assessments - Economic performance and outlook: - After slowing to 4.1 percent in 2009 from 11.2 percent in 2008, real GDP growth for 2010 is expected to reach 6.5 percent. - The external current account deficit (excluding grants) narrowed to 17.3 percent of GDP in 2010, from 18.6 percent in 2009. - Annual inflation remained below 5 percent in 2010. - Monetary policy was accommodative; the central bank cut the policy (key repo) rate by 300 basis points since November 2009. - Rwanda’s medium-term potential growth estimated at about 8½ percent, conditional on: (i) investment scaled up significantly; (ii) productivity growth increases and remains elevated; (iii) absence of adverse shocks. - Achieving and maintaining 8½ percent growth requires additional investments of at least $350 million (or 7 percent of GDP) a year. - Risks to the outlook: slower pickup in external demand and domestic credit; donor flows expected to remain strong but decline gradually; upside risks to inflation from higher global food and fuel prices. - Policy recommendations and program priorities under the PSI: - Maintain a sustainable fiscal position through improved revenue mobilization. - Strengthen monetary and exchange rate policies to ensure low and stable inflation. - Reduce financial sector vulnerability by strengthening banking supervision and deepening the financial sector by enhancing access to credit. - Diversify the export base and improve the business environment. - Gradually unwind fiscal stimulus and embark on a medium-term path toward fiscal consolidation. - Complement revenue mobilization with tax policy reforms; strengthen medium-term fiscal framework, including: - better costing of government spending plans in the Medium-Term Expenditure Framework; - improved alignment of external grants with a medium-term domestic debt strategy; - quarterly dissemination of fiscal data. - Further enhance public expenditure accountability and efficiency; strengthen public investment planning and evaluation and debt management capacity when scaling up infrastructure spending, especially with nonconcessional financing. - Regularly review the monetary policy stance; use the policy rate more actively; develop an active debt market with longer-dated instruments. - Continue analytical support for the Monetary Policy Committee and continue reforms toward greater exchange rate flexibility. - Improve access to finance while ensuring sufficient supervisory capacity for microfinance institutions and savings and credit cooperatives; develop and implement a plan to build and retain banking supervision staff; enhance competition in the banking sector. - Improve quality of statistics, particularly national accounts and balance of payments. ### Selected numeric indicators (highlights) - Real GDP growth: 2008 = 11.2; 2009 = 4.1; 2010 = 6.5 (expected). - External current account balance (excluding official transfers): 2009 = -18.6 percent of GDP; 2010 = -19.3 percent of GDP (table); narrative notes narrowing to 17.3 percent of GDP in 2010 from 18.6 percent in 2009 (excluding grants). - Investment requirement to sustain higher growth: $350 million (or 7 percent of GDP) a year. - Central bank policy rate cuts: 300 basis points since November 2009. - Gross official reserves (Millions of U.S. dollars): 2009 = 742.2; 2010 = 744.3; projection 2011 = 737.2. - Gross reserves (in months of imports of goods and services): 2009 = 5.5; 2010 = 4.8; projection 2011 = 4.6. - National savings (percent of GDP): 2009 = 3.8; 2010 = 3.5; projection 2011 = 6.1. - Gross investment (percent of GDP): 2009 = 22.4; 2010 = 22.8; projection 2011 = 23.4. - Total revenue (excl. grants, percent of GDP): 2009 = 14.9; 2010 = 12.2; projection 2011 = 12.5. - Total expenditure and net lending (percent of GDP): 2009 = 26.4; 2010 = 25.9; projection 2011 = 25.8. - Overall fiscal balance after grants (percent of GDP): 2009 = -2.2; 2010 = -1.1; projection 2011 = -0.1. - External debt (end of period, percent of GDP): 2009 = 14.5; 2010 = 16.4; projection 2011 = 14.9. - Reserve/Base Money reporting lag: weekly with one-week lag; monetary survey and consolidated bank balance sheet: monthly with about five weeks lag. *Source: _cr1119 - 10. Real sector data are reported regularly for publication in International Finance (PDF).* ### 2008. Key drivers that suffered the impact of slowing global demand are recovering ### 2008. Key drivers that suffered the impact of slowing global demand are recovering ### Macroeconomic recovery and external sector - Exports, services, tourism, and construction are recovering, contributing to improved economic buoyancy. - Recovery is occurring in a more stable macroeconomic environment, with inflation "lying in low single digits." - Reserves are projected to cover 4.6 months of imports at end-year. ### Fiscal performance and stance - Domestic revenue exceeded targets by about 0.7 percent of GDP, driven by overperforming taxes on goods and services and direct taxes. - Spending was in line with the program, although foreign-financed capital projects experienced delays in external loan disbursements. - My authorities implemented a large fiscal stimulus in 2009/10 of about 2 percent of GDP in response to the global crisis. - Going forward, authorities are committed to gradually unwinding the fiscal stimulus and renewing efforts at fiscal consolidation. - Fiscal consolidation plan over the next three years: - Reduce the level of spending by 0.2 percent of GDP per annum on average. - Boost domestic revenue mobilization by 0.6 percent of GDP per annum on average. - Temporary spending cuts have been taken to mitigate revenue loss from EAC and COMESA membership while conducting further analysis to adopt permanent measures. - Fiscal policy will emphasize enhanced PFM reforms, drawing on the PEFA assessment and continued partnership with donors and East AFRITAC. ### Monetary policy, financial deepening, and credit - Monetary and exchange rate policy has been accommodative to boost growth: the NBR pursued repeated cuts in the policy rate and lowered reserve requirements on bank deposits. - Credit growth has been slow to respond due to cautious bank behavior and weak transmission, but is expected to increase to 10 percent by December 2010 against 6 percent at end-December 2009. - Authorities will continue efforts to deepen the financial sector to improve monetary policy transmission and enhance credit to the private sector. - Commitments to improve conduct of monetary and exchange rate policy include building capacity, improving the functioning of the monetary policy committee, and fine tuning the mix of instruments. ### Financial sector soundness and reforms - Authorities and staff view the banking sector as generally sound, profitable, and well capitalized. - Key banking sector indicators: - Capital adequacy ratio of the banking system: 17.6 percent as of June 30, 2010. - Nonperforming loans (NPLs): decreased from 13.1 percent in December 2009 to 12.2 percent at end June 2010. - Return on equity: increased from 6.4 percent to 10.3 percent compared to June 30, 2009. - Return on assets: increased from 0.9 percent to 1.3 percent compared to June 30, 2009. - Authorities recognize the need to build a strong financial sector covering large unbanked segments and capable of supporting robust private sector activity. - Steps to strengthen and deepen the financial market: - Licenses granted to some 400 Savings and Credit Cooperatives (SACCOs) to operate as deposit-taking institutions, with lending licenses to follow. - Adoption of banking regulations and other elements of the legal framework. - NBR will strengthen supervision by building capacity and emphasize microfinance institutions through a newly adopted package of regulatory and institutional reforms. ### Competitiveness, private sector development, and infrastructure - Authorities aim to post real output growth well above 7 percent over the medium term. - Policy measures to unleash growth potential: - Create an enabling environment for the private sector, including tax incentives and exemptions to attract private investment. - Provide economic infrastructure through strategic investments and mechanisms such as PPPs to lift infrastructure bottlenecks. - Develop the financial sector further to boost credit. - Implement an export strategy emphasizing competitiveness and diversification away from traditional products to explore niche markets. - Exchange rate policy will accommodate the need to remain competitive. - Authorities will build on favorable rankings in the 2010 global competitiveness indicators and World Bank Doing Business rankings. ### Poverty reduction and social objectives - Poverty remains the overarching goal: 57 percent of the population lived below the national poverty line in 2006. - Progress reported: - Appreciable results in the agriculture sector where most poor populations live. - On track to achieve health and education-related MDGs, including increased coverage and quality of basic and tertiary education, and strengthened technical and vocational education and training. - MDGs related to gender equality achieved; good progress on access to water and sanitation. - Improvements in basic infrastructure including roads and electricity provision. - Authorities are committed to further empowering the most vulnerable segments to lift them out of poverty. ### Program assessment and concluding commitments - The PSI program provides an adequate framework to consolidate policymaking gains achieved over the past decade with international support. - Despite a severe global crisis that turned into recession, authorities took measures that helped maintain output and a stable macroeconomic situation. - Performance under the PSI has been satisfactory and the economy is regaining momentum. - Authorities remain fully committed to continuing reforms and count on support from partners, especially the Fund, to advance growth and poverty reduction. *Source: _cr1119 - 2008. Key drivers that suffered the impact of slowing global demand are recovering* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1119.pdf_