## _cr13177

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### Rwanda’s Euro Bond and Use of Proceeds
- Issue size: US$400 million.
- Ratings: B by Fitch and Moody’s.
- Tenor: 10-year notes.
- Coupon: 6.625%.
- Pricing and demand:
  - Issue nine times oversubscribed.
  - Priced at 98.213, to yield 6.875%.
- Planned use of proceeds:
  - Half to repay unfavorable government-guaranteed loans for Rwandair and the Kigali Convention Center.
  - The other half to finance completion of the Kigali Convention Center (US$150 million) in FY2013/14 and the Nyabarongo hydro-power plant (US$50 million).
- Market observations:
  - Issue capped at US$400 million (short of US$500 million minimum for global emerging market bond indices inclusion).
  - Yield compares favorably with yields obtained by Nigeria and Senegal.
  - Incremental impact of the larger euro bond contributes about 1 percentage point to deterioration in PV-to-exports indicator.

### Macroeconomic Developments and Outlook
- Recent performance:
  - Real GDP growth: 8 percent in 2012.
  - Growth drivers in 2012: rapid expansion of construction (15 percent) and services (communication and transport activities expanded by 19 percent).
  - Private sector credit expansion in 2012: 34 percent (also noted as 33.8 percent in a related paragraph).
  - Agricultural production (food crops): grew by 3 percent; export crops (tea and coffee): declined by 9 percent.
  - Headline inflation December 2012: 3.9 percent year-on-year; core inflation December 2012: 2.5 percent year-on-year; March 2013 headline 3.3 percent; core 4.8 percent.
  - Rwandan franc (RWF) depreciation: about 4.5 percent over 2012 (also noted as more than 5 percent since beginning of 2012 in one paragraph).
  - Balance of payments: Current account deficit 11.4 percent of GDP in 2012; balance of payments turned negative in 2012 due to aid shortfall and high imports.
  - Export growth led by non-traditional exports; traditional exports (particularly coffee) grew weakly.
- Projections and outlook:
  - Real GDP projected to grow by 7.5 percent in 2013.
  - Converge to about 7 percent annually over the medium term.
  - Inflation expected to average 5.6 percent in 2013, rising due to exchange rate pass-through.
  - Downside risks: further cutbacks in aid; delays in project implementation; more challenging global environment.
  - Sensitivity estimate: For each 1 percent of GDP in budget support not disbursed, growth would be ½ percentage point lower.

### Fiscal Policy, Budgetary Adjustments, and Revenue Mobilization
- Aid and fiscal impact:
  - Budget support for FY2012/13 expected to fall 1.2 percent of GDP short of the budgeted amount and by 3.2 percent of the previously expected amount for FY2013/14.
  - Grant disbursements about 1 percent of GDP lower than assumed in October.
- FY2012/13 measures:
  - Spending re-phased and reduced through supplementary budget approved February 2013; hiring freeze and cuts to non-priority current spending to preserve overall fiscal deficit target (excluding net lending related to the euro bond).
  - Authorities aimed to eliminate arrears (0.7 percent of GDP) by end-June 2013; arrears reduced by two-thirds by March 2013.
- FY2013/14 framework (approved by cabinet in early May):
  - Budget support disbursements expected to be about 3.2 percent of GDP lower than previously expected.
  - To bridge gap:
    - Increase in revenue of 0.3 percent of GDP (changes to investment code, royalty tax on mining, roll-out of electronic billing machines, renegotiation of double taxation treaty with Mauritius).
    - Cut in current spending by 1.4 percent of GDP.
    - Cut in domestically-financed capital spending by 0.7 percent of GDP.
    - Limited domestic financing of 0.8 percent of GDP (staff-supported measure).
    - Expect increase in capital grants of 0.8 percent of GDP.
  - Revenue mobilization:
    - Government committed to preparing a comprehensive revenue mobilization strategy by end-June 2013 (structural benchmark), with FAD technical assistance.
    - Revenue measures projected to yield revenue amounting 1 percent of GDP in 2013/2014.
  - Fiscal projections and numbers:
    - Total expenditure and net lending projected at 29.2 percent of GDP in FY2013/2014.
    - Capital spending for FY2013/2014: RWF 744.5 billion (13.8 percent of GDP) vs RWF 625 billion (13.4 percent of GDP) in 2012/2013.
    - Overall deficit (including grants) projected to decline from 5.9 percent of GDP in 2012/2013 to 5.4 percent of GDP in 2013/2014.
    - New domestic cash finance for 2013/2014 budget: RWF 30.3 billion (0.6 percent of GDP).
- Fiscal implementation H1 FY2012/13 (July–December 2012):
  - Domestic revenue collections: RWF 346.2 billion.
  - Grant disbursements shortfall: RWF 44.4 billion (0.9 percent of GDP).
  - Domestic arrears recorded: RWF 34.4 billion (0.7 percent of GDP) at end-2012.
  - Consolidated domestic debt marginally exceeded target due to use of overdraft and rollover of treasury bills.

### Monetary Policy and Exchange Rate Stance
- Monetary policy actions and framework:
  - Key repo rate unchanged at 7.5 percent since May 2012.
  - NBR tightened monetary policy in H2 2012 by slowing reserve money growth and allowing real interest rates to rise.
  - Reserve money program: flexible band of +/-2 percent around a central reserve money target; ceiling on reserve money is upper bound of the band.
  - Monetary program for 2013 targets:
    - Growth rate of reserve and broad money at about 15 percent by year-end.
    - Growth in credit to the private sector projected to slow from about 34 percent at end-2012 to about 14 percent at end-2013.
  - Reserve money growth in 2012: in line with target; broad money growth slowed to 14 percent at end-December 2012 (versus projection of 16.5 percent).
  - Net foreign assets declined by 17.2 percent in 2012 as NBR met market demand for foreign exchange.
- Exchange rate developments and policy stance:
  - Spread between official and market exchange rates emerged: about 5 percent in March 2013; narrowed to about 1.6 percent by late-May; authorities expect spread to return to below 2 percent (levels prevailing before mid-2012).
  - RWF depreciated by about 4.5 percent over 2012.
  - Authorities committed to strengthen implementation of exchange rate corridor and allow market developments to be fully reflected in the official exchange rate (greater exchange rate flexibility).
  - Operational note: NBR determines exchange rate within a corridor based on previous day’s exchange rate, the interbank rate, and international developments; interbank market remains fledgling and NBR is the main player.
- Monetary transmission and capacity building:
  - Monetary transmission hampered by shallowness of markets, particularly low interbank market transactions.
  - NBR recognizes requirements for eventual adoption of an inflation targeting framework; sought technical assistance from MCM; capacity building underway (including forecasting inflation).
  - FPAS model components used for forecasting and policy analysis: IS curve, Phillips curve, Taylor rule, modified uncovered interest parity (UIP).

### Financial Sector Policy, Supervision, and Reforms
- Financial soundness and performance:
  - Capital adequacy and asset quality indicators continued to improve; regulatory capital to risk-weighted assets series: 19.0 21.6 23.8 24.1 22.5 21.4 21.4 (percent series).
  - NPLs/gross loans series: 13.1 11.3 8.2 6.3 5.8 6.3 6.1 (percent series).
  - Banking expansion continued; ratio of non-performing loans declined.
  - High overheads remain a drag on profitability.
- Policy priorities and actions:
  - Bolster supervisory capacity within NBR (manage turnover of bank examiners; enhance cross-border supervision of regional banks).
  - Memorandum of understanding on cross-border supervision signed; first joint inspections set to start shortly.
  - Plans to consolidate SACCOs into one cooperative bank by end-2014; district-level consolidation by end-December 2013.
  - Second financial sector development plan (FSDP2) to promote financial inclusion and mobilize domestic savings.
  - Other priorities: consumer protection, crisis identification and preparedness, capacity building.
- Regulatory initiatives:
  - Review NBR Law and banking law; prepare deposit insurance law; update regulations and supervisory tools; continue off-site surveillance and on-site examinations under risk-based supervision.
  - Ten (10) on-site inspections planned for 2013; quarterly prudential meetings with banks.

### External Sector, Debt Sustainability, and Risks
- External sector performance:
  - Exports (f.o.b., US$ millions): 235.0 322.4 464.2 539.6 590.8 590.2 650.7 739.3 807.1 879.5 971.0 1,053.3 (time series).
  - Imports (f.o.b., US$ millions): 999.2 1,084.0 1,565.8 1,880.8 1,967.0 2,028.0 2,142.1 2,274.2 2,056.5 2,159.6 2,338.0 2,521.4 (time series).
  - Trade balance (US$ millions) and financing series shown; gross official reserves (including SDR allocation, US$ millions): 742.2 813.3 1,050.0 1,144.2 843.5 989.0 925.5 934.1 992.3 1,075.2 1,155.8 1,226.2.
- Debt sustainability assessment (LIC DSA):
  - Baseline: Rwanda’s debt remains sustainable under baseline scenario but exhibits vulnerabilities related to small export base.
  - Under current estimates, PV-to-exports breach will now peak at about 234 percent of exports (218 percent previously) and will last for eight years (two years previously).
  - Deterioration mainly due to larger recourse to concessional financing in face of decline in budget grants; incremental impact of larger euro bond about 1 percentage point.
- Appendix Table 4 (selected baseline PV of debt-to-GDP ratios):
  - Baseline PV of Debt-to-GDP: 26 24 24 24 25 26 26 24 (years implicit: 2012 2013 2014 2015 2016 2017 2022 2032).
  - Alternative scenarios and bound tests presented with series (see Table for full sequences).
- Reserve policy:
  - NBR target to keep official reserves above minimum level of 4 months of prospective imports (CIF).

### Program Performance under the PSI, Conditionality, and Staff Appraisal
- Sixth review QACs and performance:
  - Implementation satisfactory overall.
  - All QACs met except two:
    - Net foreign assets (NFA) target missed by less than 5 percent of the stock of reserves (reflecting strong market FX demand and reduced aid inflows).
    - Continuous ceiling on non-concessional borrowing breached because government expanded bond size by US$50 million to US$400 million for hydro project.
  - Quantitative indicative targets missed on consolidated domestic debt (greater-than-planned domestic borrowing) and domestic arrears (cash constraint from aid shortfall).
  - Structural benchmarks: of six SBs, five completed; IFMIS technical design specification delayed and re-phased to end-September 2013.
  - Staff supports waivers for non-observance of the QAC on NFA at end-2012 and the continuous QAC on non-concessional borrowing.
- Program extension and conditionality:
  - Authorities requested extension of current PSI by seven months, to end-January 2014, to prepare medium-term economic program for potential new three-year PSI.
  - Agreement on new QACs and indicative targets for end-June 2013 and end-December 2013, including higher ceiling on contracting of non-concessional debt to reflect larger euro bond.
  - New structural benchmark: preparation of a domestic revenue mobilization strategy by end-June 2013.
- Staff appraisal key recommendations:
  - Policies should adjust to available financing and preserve policy buffers; full use of monetary instruments, especially greater exchange rate flexibility, is crucial.
  - Proceeds of the euro bond should be used exclusively for retiring unfavorable government-guaranteed debt and completing strategic investment projects.
  - Staff encourages continued development and application of a medium-term debt management strategy.
  - Staff welcomes EDPRS2 with emphasis on inclusive growth and eradication of extreme poverty within five years.

### Key Quantitative Indicators and Exact Numeric Values Cited
- Euro bond: US$400 million; coupon 6.625%; priced at 98.213; yield 6.875%; ten-year tenor.
- Growth and inflation figures and projections:
  - Real GDP growth series (selected): 6.2 7.2 8.2 7.7 8.0 7.6 7.5 7.5 7.0 7.0 7.0 6.8.
  - CPI (period average) series: 10.3 2.3 5.7 7.9 6.3 7.0 5.7 6.8 5.8 5.3 5.0 5.0.
  - Inflation target referenced: 5 percent.
  - Inflation expected to average 5.6 percent in 2013.
- Exchange rate and reserve indicators:
  - Spread between official and market exchange rates: around 5 percent in March 2013; about 1.6 percent by late-May; authorities target below 2 percent.
  - RWF depreciation: about 4.5 percent over 2012.
  - Reserve cover declined to 3.4 months of prospective imports by end-2012 (noted earlier); NBR target to keep official reserves above 4 months of prospective imports (CIF).
  - Gross reserves (months of imports of goods and services) series: 5.4 4.5 5.1 5.2 3.7 4.6 3.8 4.0 4.0 4.0 4.0.
- Fiscal and public finance figures:
  - Budget support fall: 1.2 percent of GDP short for FY2012/13; 3.2 percent of GDP lower for FY2013/14 (previously expected).
  - Arrears: 0.7 percent of GDP at end-2012; domestic arrears RWF 34.4 billion.
  - Proceeds of euro bond: US$400 million = RWF 259.4 billion.
  - FY2013/2014 revenue projection: increase from RWF 641.2 billion (13.7 percent of GDP) to RWF 749.1 billion (13.9 percent of GDP).
  - Reserve money band: +/-2 percent around central reserve money target.
  - Private sector credit projected to slow from about 34 percent at end-2012 to about 14 percent at end-2013.
- Debt sustainability metrics:
  - PV-to-exports breach peak at about 234 percent of exports (218 percent previously); duration eight years (two years previously).
- Program timelines and benchmarks:
  - PSI extension requested to end-January 2014.
  - IFMIS structural benchmark re-phased to end-September 2013.
  - Domestic revenue mobilization strategy benchmark: by end-June 2013.
  - SACCO consolidation target: by end-2014.
  - Letter of Intent and MEFP dated May 24, 2013 (Kigali, Rwanda).

*Source: IMF staff report excerpts and attached MEFP (Country Report No. 13/77, document _cr13177).*

### 1. Rwanda’s Euro Bond ___________________________________________________________________________ 6

### 1. Rwanda’s Euro Bond

### The context and policy response
- Rwanda faced an aid shortfall following the suspension and delay of some bilateral and multilateral aid; donor sentiment improved after a regional peace agreement in February 2013.
- Budget support for FY2012/13 is expected to fall 1.2 percent of GDP short of the budgeted amount and by 3.2 percent of the previously expected amount for FY2013/14.
- Authorities tightened policies and drew on foreign reserves:
  - Spending was re-phased and reduced through a supplementary budget approved by parliament in February 2013.
  - The National Bank of Rwanda (NBR) tightened monetary policy in the second half of 2012 by slowing reserve money growth and allowing real interest rates to rise.
  - Reserve cover declined to 3.4 months of prospective imports by end-2012.

### Recent macroeconomic developments
- Real GDP growth was 8 percent in 2012, driven by rapid expansion of the construction and services sectors.
- Growth slowed in the second half of 2012; agricultural production was modest.
- Inflationary pressures eased due to decelerating food and fuel import price shocks and tighter monetary conditions.
- The Rwandan franc depreciated against the US dollar by about 4.5 percent in 2012, partly offset by decelerating inflation in trading partners (notably Kenya and Uganda).
- Balance of payments turned negative in 2012 due to the aid shortfall and high imports.
- Export growth remained high from a small base, led by non-traditional exports; traditional exports (particularly coffee) grew weakly.
- Fiscal implementation in H1 FY2012/13 (July–December 2012):
  - Domestic revenue broadly as projected at the time of the fifth PSI review in October 2012.
  - Grant disbursements about 1 percent of GDP lower than assumed in October.
  - Government delayed payments (arrears for program purposes) of 0.7 percent of GDP by end-2012 and used the central bank overdraft facility.
- Monetary developments in 2012:
  - Key repo rate unchanged at 7.5 percent since May 2012; real rates became significantly positive in H2 2012.
  - Reserve money growth in line with target; broad money growth slowed to 14 percent at end-December 2012.
  - A market spread of about 5 percent emerged between official and market exchange rates by end-2012; narrowed to about 1.6 percent by late-May.

### Euro bond issuance and use of proceeds
- In late April 2013, the government issued a US$400 million euro bond.
- Planned use of proceeds:
  - Half of the proceeds to repay unfavorable government-guaranteed loans for Rwandair and the Kigali Convention Center.
  - The other half to finance completion of the Kigali Convention Center (US$150 million) in FY2013/14 and the Nyaborongo hydro-power plant (US$50 million).

### Box 1 — Details of the euro bond
- Issue size: US$400 million.
- Ratings: B by Fitch and Moody’s (following a sovereign rating of B for Rwanda).
- Tenor: 10-year notes.
- Coupon: 6.625%.
- Pricing and demand:
  - The issue was nine times oversubscribed.
  - Priced at 98.213, to yield 6.875%, at the low end of analysts’ expectations.
- Market observations:
  - The issue amount is smaller than those of some other Sub-Saharan African countries since 2011.
  - The yield compares favorably with yields obtained by Nigeria and Senegal.
  - Rwanda capped the bond at US$400 million, short of the US$500 million minimum required to qualify for inclusion in global emerging market bond indices.

### Box 2 — The electricity sector and rationale for Nyabarongo completion
- Government decided to complete the 28 MW Nyabarongo hydro-power plant in FY2013/14 using US$50 million from the euro bond.
- Project background:
  - Started in 2009 with a US$100 million loan from the Export-Import Bank of India.
  - Core element of EDPRS2 strategy to increase power generation capacity and access.
- Objectives:
  - Reduce reliance on diesel and heavy fuel oil-based generation.
  - Eliminate fiscal subsidy to thermal generation, which amounted to about 0.5 percent of GDP in FY2012/13.
- Current electricity context:
  - Less than 20 percent of the population has access to electricity.
  - Installed generation capacity about 100 MW: hydro ~60 percent, thermal ~40 percent.
  - Average (unsubsidized) cost of generation: US$0.25-0.3 per kWh.
  - Electricity tariff in Rwanda close to US$0.2 per kWh (compared to US$0.1-0.15 per kWh in other EAC countries).
  - Projected cost of generation at Nyabarongo: around US$0.1 per kWh.
- Expected benefits:
  - Add capacity and bring average cost of generation down sharply by allowing retirement of expensive thermal capacity.
  - Narrow gap between average tariff and average cost of generation and reduce the fiscal subsidy.

### Program performance under the PSI
- Implementation satisfactory overall.
- Quantitative assessment criteria (QACs) for the sixth review:
  - All met except two:
    - Net foreign assets (NFA) target missed by less than 5 percent of the stock of reserves (reflecting strong market FX demand and reduced aid inflows).
    - Continuous ceiling on non-concessional borrowing breached because government expanded bond size by US$50 million to US$400 million for hydro project.
  - Minor deviations provide a basis for waivers given authorities’ commitments and minimal impact on debt sustainability.
- Quantitative indicative targets:
  - Missed on consolidated domestic debt (greater-than-planned domestic borrowing) and domestic arrears (cash constraint from aid shortfall).
- Structural benchmarks:
  - Of six SBs, five completed.
  - SB on technical design specification of IFMIS delayed and re-phased to September 2013.

### Outlook, risks, and growth projections
- Macroeconomic outlook for 2013 weakened somewhat since the fifth PSI review.
- Growth drivers:
  - Service and construction growth expected to slow with tighter policies.
  - Offset partly by higher agricultural growth (first harvest of food crops good) and acceleration of foreign-financed investment projects.
- Real GDP projections:
  - Real GDP projected to grow by 7.5 percent in 2013.
  - Converge to about 7 percent annually over the medium term.
- Inflation:
  - Expected to average 5.6 percent in 2013, rising due to exchange rate pass-through.
- Downside risks:
  - Possible further cutbacks in aid.
  - Delays in project implementation.
  - A more challenging global environment.
- Sensitivity estimate from staff (from Country Report No. 13/77):
  - For each 1 percent of GDP in budget support not disbursed, growth would be ½ percentage point lower.

### Fiscal policy adjustments and FY2013/14 framework
- FY2012/13 supplementary budget measures:
  - Hiring freeze and cuts to non-priority current spending to preserve overall fiscal deficit target (excluding net lending related to the euro bond).
  - Authorities aimed to eliminate arrears (0.7 percent of GDP) by end-June 2013; arrears reduced by two-thirds by March 2013.
- FY2013/14 agreed budget framework (approved by cabinet in early May) aligned with PSI objectives:
  - Budget support disbursements expected to be about 3.2 percent of GDP lower than previously expected.
  - To bridge the gap, authorities project:
    - Increase in revenue of 0.3 percent of GDP (through changes to the investment code, adoption of a royalty tax on mining, roll-out of electronic billing machines, renegotiation of a double taxation treaty with Mauritius).
    - Cut in current spending by 1.4 percent of GDP.
    - Cut in domestically-financed capital spending by 0.7 percent of GDP.
    - Limited domestic financing of 0.8 percent of GDP.
    - Expect increase in capital grants of 0.8 percent of GDP.
  - Staff-supported measure: limited domestic financing of 0.8 percent of GDP to lessen immediate adjustment need.
  - Authorities stand ready to take additional spending or revenue measures if downside risks materialize.
- Revenue mobilization:
  - Government committed to preparing a comprehensive revenue mobilization strategy by end-June 2013 (structural benchmark), with FAD technical assistance.
  - Emphasis on broadening tax base and improving revenue administration.

### Monetary and exchange rate policy stance
- Agreement on need to maintain a tight monetary stance.
- Monetary program for 2013 targets:
  - Growth rate of reserve and broad money at about 15 percent by year-end.
  - Growth in credit to the private sector projected to slow from about 34 percent at end-2012 to about 14 percent at end-2013.
- Policy rationale:
  - Preserve reserve buffers.
  - Greater exchange rate flexibility to help preserve international reserves.

*Source: IMF country report content provided in the supplied text.*

### 17.      The mission underscored the need for greater exchange rate flexibility. The authorities

### _cr13177 - 17.      The mission underscored the need for greater exchange rate flexibility. The authorities

### Exchange rate developments and policy stance
- Findings:
  - Aid shortfall and buoyant demand for foreign exchange, due in part to strong private sector credit and import growth in the second half of 2012, contributed to market pressures and an emerging spread between the official and market exchange rates (Box 3).
  - The spread was around 5 percent in March 2013 despite some depreciation of the currency and interventions by the NBR.
  - By late-May, the spread had narrowed to about 1.6 percent, reflecting the resumption of aid disbursements and a more effective use of the exchange rate corridor by the NBR.
- Policy commitments and actions by authorities:
  - Authorities concurred that greater exchange rate flexibility would help mitigate the impact of the aid shortfall on reserves and contribute to narrowing the spread.
  - They committed to strengthening implementation of the exchange rate corridor by allowing market developments to be fully reflected in the official exchange rate.
  - Authorities anticipated that greater flexibility, coupled with resumption of aid disbursements, would narrow the spread with the open market to levels prevailing before mid-2012 of below 2 percent.
- Operational notes (Box 3):
  - The NBR determines the exchange rate within a corridor, based on the previous day’s exchange rate, the interbank rate, and international economic developments.
  - The interbank market was fledgling; the NBR is the main player in the foreign exchange market.
  - The RWF depreciated by about 4.5 percent over 2012, mostly in the last few months of the year.
  - Between September 2012 and March 2013, a spread of about 5 percent emerged between the official and market exchange rates.

### Monetary framework and transmission
- Findings:
  - Authorities moved to a reserve money band of +/-2 percent around a central reserve money target.
  - This approach has been functioning smoothly for liquidity management by obviating the need to focus excessively on a point target for reserve money.
  - Monetary transmission remains hampered by shallowness of markets, particularly the low level of transactions in the interbank market.
- Capacity building and framework evolution:
  - NBR recognizes requirements for eventual adoption of an inflation targeting framework and has sought technical assistance from MCM.
  - Capacity building, including on forecasting inflation, is already underway.
- FPAS (Box 4) model structure used for forecasting and policy analysis:
  - IS curve: relates monetary policy and real economic activity (aggregate demand);
  - Phillips curve: relates real economic activity and inflation (aggregate supply);
  - Monetary policy rule (Taylor rule): describes the response of the central bank to deviations of inflation from target and the phase of economic activity;
  - Modified uncovered interest parity (UIP): describes the behavior of the exchange rate, allowing for deviations from UIP.
- FPAS outputs:
  - Filtration exercise helps determine contributions to deviations from the 5 percent inflation target.
  - In 2012, monetary tightening and the decline in food inflation reduced inflationary pressures; demand-side factors (buoyant private sector credit growth) and exchange rate developments associated with the aid shortfall also contributed.

### Financial sector policy and supervision
- Findings:
  - Capital adequacy and asset quality indicators continued to improve.
  - Banking expansion continued and the ratio of non-performing loans declined.
  - High overheads remain a drag on profitability.
- Policy priorities and actions:
  - Need to bolster supervisory capacity within the NBR, including better managing turnover of bank examiners and enhancing cross border supervision of regional banks.
  - A memorandum of understanding on cross border supervision has been signed between eligible countries and first joint inspections are set to start shortly.
  - Plans to consolidate the SACCOs into one cooperative bank by end-2014 are broadly on track.
  - The second financial sector development plan (FSDP2) aims to promote financial sector development to foster financial inclusion and mobilize domestic savings.
  - Other priorities: supporting consumer protection, crisis identification and preparedness, and capacity building.

### External policy and debt sustainability
- Staff assessment:
  - Using the LIC debt sustainability framework, the DSA shows Rwanda’s debt remains sustainable under a baseline scenario.
  - Rwanda exhibits vulnerabilities related to its small export base.
  - A shock to exports leads the PV-to-exports indicator to breach its threshold.
- Quantitative results and comparisons:
  - Under current estimates, the breach will now peak at about 234 percent of exports (218 percent previously) and will last for eight years (two years previously).
  - The incremental impact of the larger euro bond contributes only about 1 percentage point to this deterioration.
  - Deterioration is mainly due to larger recourse to concessional financing in the face of a decline in budget grants and transfers.
- Scenario indicators shown in Text Figure 4:
  - Scenarios displayed: Baseline, Historical scenario, Extreme shock (present value of external debt as a percentage of exports of goods and services) across 2012–2032 horizons.

### Program issues and staff appraisal
- Program extension and conditionality:
  - Authorities requested an extension of the current PSI by seven months, to end-January 2014, to prepare a medium-term economic program for a potential new three-year PSI.
  - Agreement on new QACs and quantitative indicative targets for end-June 2013 and end-December 2013, including a higher ceiling on contracting of non-concessional debt to reflect the larger euro bond issue.
  - Re-phasing of the structural benchmark on IFMIS to end-September 2013 and inclusion of a new benchmark on preparation of a domestic revenue mobilization strategy by end-June 2013.
- Staff appraisal key points:
  - Authorities commended for continued satisfactory performance under the PSI in challenging circumstances.
  - Response to suspension and delays in budget support was broadly appropriate: re-phasing and reducing spending in FY2012/13, tightening monetary policy, and using reserve buffers to minimize impact on economic activity.
  - Economy remains vulnerable and room for maneuver has diminished; reliance on reserves to cushion shocks is reduced.
  - Policies should adjust to available financing and preserve policy buffers; full use of monetary instruments, especially greater exchange rate flexibility, is crucial.
  - FY2013/14 budget framework aligns with PSI objectives: mobilizes additional domestic revenue, adjusts current spending to available resources, minimizes domestic financing, protects priority spending, and uses prudent assumptions on budget support disbursements.
  - Authorities’ plan to develop a comprehensive domestic revenue mobilization strategy over the medium term is timely; additional domestic resources will be required to sustain priority spending, including domestically-financed capital spending and investment projects.
  - Staff welcomes the new poverty reduction strategy (EDPRS2) with emphasis on inclusive growth and eradication of extreme poverty within five years.
  - Authorities’ commitment to tighten monetary stance while allowing greater exchange rate flexibility is welcomed.
  - Proceeds of the euro bond should be used exclusively for retiring unfavorable government-guaranteed debt and completing strategic investment projects; staff encourages continued development and application of a medium-term debt management strategy.

### Key statistics and exact numeric values cited
- Spread between official and market exchange rates:
  - around 5 percent in March 2013;
  - below 2 percent (levels prevailing before mid-2012, as expected by authorities);
  - about 1.6 percent by late-May.
- RWF depreciation:
  - about 4.5 percent over 2012.
- Reserve money band:
  - +/-2 percent around a central reserve money target.
- Inflation target referenced:
  - 5 percent.
- Debt sustainability breach metrics:
  - peak at about 234 percent of exports (218 percent previously);
  - duration of eight years (two years previously).
- Program dates and targets:
  - PSI extension requested to end-January 2014;
  - SACCO consolidation target: by end-2014;
  - IFMIS structural benchmark re-phased to end-September 2013;
  - domestic revenue mobilization strategy benchmark: by end-June 2013.
- Time horizons in Text Figure 4:
  - 2012, 2017, 2022, 2027, 2032.

*Source: IMF staff; IMF Country Report No. 13/77 (document _cr13177).*

### 29.      Staff recommends the completion of the sixth review under the PSI. Staff supports

### _cr13177 - 29. Staff recommends the completion of the sixth review under the PSI. Staff supports

### Program decision and conditionality
- Staff recommends the completion of the sixth review under the PSI.
- Staff supports waivers for the non-observance of the QAC on NFA at end-2012 and the continuous QAC on non-concessional borrowing.
- Staff supports the authorities' request for an extension of the PSI by seven months, to end-January 2014.

### Recent macroeconomic performance (high-level findings)
- Output growth: Real GDP growth: 6.2 7.2 8.2 7.7 8.0 7.6 7.5 7.5 7.0 7.0 7.0 6.8.
- Inflation (period average): Consumer prices (period average): 10.3 2.3 5.7 7.9 6.3 7.0 5.7 6.8 5.8 5.3 5.0 5.0.
- External sector: Current account balance (including official transfers): -7.3 -5.4 -7.2 -11.3 -11.4 -10.2 -11.3 -11.3 -7.3 -5.7 -5.2 -5.0 (percent of GDP).
- Gross reserves (months of imports of goods and services): 5.4 4.5 5.1 5.2 3.7 4.6 3.8 4.0 4.0 4.0 4.0.
- External debt (end of period, percent of GDP): 14.9 14.9 18.5 21.3 17.7 20.4 17.3 19.4 23.6 26.3 27.6 28.2.
- Nominal GDP (billions of Rwanda francs, memorandum): 2,985 3,280 3,814 4,437 4,363 5,118 4,995 5,784 6,618 7,534 8,553 9,599.

### Inflation developments and outlook
- Headline and core inflation have been declining; headline and core CPI were stable during the second half of 2012.
- Drivers and dynamics:
  - Food inflation slowdown observed in local and imported food prices.
  - Imported food and cereals prices moderated since H2:2011.
  - Fuel price growth slowed; domestic pump prices tracked international spot prices (series shown).
- Regional comparison:
  - Headline and core inflation: Rwanda has been at the low end among EAC peers (Burundi, Kenya, Tanzania, Uganda) in the sample period.
- Projections:
  - CPI Inflation (Period Average) Projections: Rwanda projections shown alongside SSA and EAC; overall outlook: low and stable inflation.

### Fiscal developments and priorities
- Fiscal stance:
  - The fiscal deficit narrowed in 2011/12 but was expected to widen in 2012/13.
  - Overall balance (incl. grants) and expenditure/net lending paths are shown in historical and projection series.
- Revenue and spending:
  - Total revenue (excl. grants; percent of GDP): 15.0 12.5 13.7 14.3 14.5 14.9 15.1 15.2 15.3 15.5 15.7 15.9.
  - Total expenditure and net lending (percent of GDP): 26.6 25.7 27.7 26.6 26.9 32.3 30.5 29.2 28.9 27.5 27.5 27.5.
  - Capital expenditure (percent of GDP): 11.1 10.0 12.4 11.7 11.8 13.7 13.4 13.8 14.6 13.1 13.1 14.8.
  - Priority spending on health, education, and social protection remains high in line with EDPRS priorities.
- Fiscal balances (percent of GDP):
  - Primary fiscal balance: -2.3 -5.1 -5.0 -3.9 -3.9 -3.0 -1.7 -0.7 -1.5 -1.3 -1.1 -1.0.
  - Domestic fiscal balance: -5.3 -8.0 -7.8 -6.0 -6.1 -9.3 -7.0 -4.5 -3.9 -3.8 -3.6 -3.8.
  - Overall fiscal balance (payment order) after grants: -2.2 -0.1 -3.4 -1.2 -1.2 -6.9 -5.9 -5.4 -3.5 -2.9 -2.9 -3.3.
- Public finance vulnerabilities:
  - External debt remains relatively low thanks to substantial debt relief.
  - Low domestic revenue remains a source of vulnerability despite recent efforts: Domestic revenue (percent of GDP): Rwanda listed among lowest relative to peers in the charts (table figures above).

### Monetary and financial sector developments
- Policy and interest rates:
  - The NBR raised the policy rate three times since October 2011 in response to rising inflation.
  - Nominal interest rates: policy, repo, interbank series shown; 91-day T-bill rate series shown relative to EAC peers.
- Money and credit:
  - Broad money (M2) annual growth: 13.1 16.8 26.8 16.5 14.0 16.3 15.5 15.5 15.4 14.8 14.5 13.2.
  - Reserve money annual growth: 0.3 12.5 23.4 16.5 17.2 16.3 14.5 14.5 14.5 14.5 14.5 14.5.
  - Private sector credit (percent changes and levels): private sector credit series show buoyant growth; credit to private sector (RWF Billion) plotted in figures.
- Liquidity and reserves:
  - Reserve money has been contained in line with program targets (actual vs. program series shown).
  - Broad money growth has slowed while private sector credit growth remained buoyant.
  - Gross official reserves (including SDR allocation): 742.2 813.3 1,050.0 1,144.2 843.5 989.0 925.5 934.1 992.3 1,075.2 1,155.8 1,226.2 (US$ millions).
- Financial soundness indicators (banking sector, selected):
  - Regulatory capital to risk-weighted assets: 19.0 21.6 23.8 24.1 22.5 21.4 21.4 (percent series).
  - NPLs/gross loans: 13.1 11.3 8.2 6.3 5.8 6.3 6.1 (percent series).
  - Return on average assets: 0.7 1.9 1.9 2.3 2.2 2.3 2.2 (percent series).
  - Liquid assets/total deposits: 65.3 57.8 46.3 48.9 47.2 40.2 41.2 (percent series).

### External sector, trade, and balance of payments
- Trade and current account:
  - Exports (f.o.b., US$ millions): 235.0 322.4 464.2 539.6 590.8 590.2 650.7 739.3 807.1 879.5 971.0 1,053.3.
  - Of which: coffee and tea: 85.6 111.8 138.5 141.8 126.6 159.1 159.3 175.1 204.2 221.7 256.5 274.5.
  - Imports (f.o.b., US$ millions): 999.2 1,084.0 1,565.8 1,880.8 1,967.0 2,028.0 2,142.1 2,274.2 2,056.5 2,159.6 2,338.0 2,521.4.
  - Trade balance (US$ millions): -764.2 -761.5 -1,101.6 -1,341.2 -1,376.2 -1,437.8 -1,491.5 -1,534.9 -1,249.4 -1,280.1 -1,367.0 -1,468.1.
- Financing and reserves:
  - Capital and financial account balance (US$ millions): 527.5 411.4 682.5 879.7 582.5 637.4 957.4 969.4 749.3 677.2 673.0 695.2.
  - Overall balance (US$ millions): 144.8 71.3 237.4 94.1 -205.5 -153.5 83.8 11.0 61.0 85.3 82.5 71.6.
- Outlook:
  - Current account is expected to improve as large investment projects come to completion, helping reserve coverage remain at an adequate level.

### Medium-term outlook and policy implications
- Growth outlook:
  - GDP growth is projected to return gradually to trend; projected contributions to real GDP growth show agriculture, industry, and services contributions with real GDP growth remaining robust in projections.
- Inflation:
  - Projected low and stable inflation consistent with medium-term outlook.
- Fiscal medium-term path:
  - Gradual unwinding of fiscal stimulus is projected, supported by a gradual increase in domestic revenue and rationalization of expenditure.
- Reserve and external adequacy:
  - Reserve coverage projected to remain adequate as current account improves.
- Policy stance summary (implicit from staff analysis and program support):
  - Maintain vigilance on inflation and monetary stance given projected rebound in inflationary pressures.
  - Continue fiscal consolidation path while protecting priority spending on health, education, and social protection.
  - Sustain external financing and reserve management to preserve adequate reserve buffers.

*Source: IMF staff report excerpts and accompanying figures and tables (Country Report 13/77).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Overview and government request
- Date and place: Kigali, Rwanda, May 24, 2013.
- The attached memorandum of economic and financial policies (MEFP) is an update covering remainder of fiscal year 2012/13 and fiscal year 2013/14.
- Despite reductions and delays in budget support, economic and program performance remained satisfactory.
- 2012 outcomes highlighted:
  - Real GDP growth: 8 percent.
  - Inflation: subdued (see detailed inflation figures below).
- Government requests:
  - Completion of the sixth review under the PSI.
  - Waivers for non-observance of QACs missed: net foreign assets (NFA) at end-December and the continuous QAC on non-concessional borrowing.
  - Extension of the PSI by seven months.
  - Approval of quantitative targets for end-June and end-December 2013 and structural benchmarks as set out in MEFP.

### Program performance through end-December 2012
- Quantitative assessment criteria (QACs):
  - "All but two QACs for the sixth review were met."
  - QAC on net foreign assets (NFA) missed by a small margin (about 6 percent of the stock of net foreign assets).
  - Continuous QAC on non-concessional borrowing breached following issuance of an augmented euro bond in April 2013 (US$ 50 million larger than previously agreed).
- Indicative targets:
  - Two indicative targets missed: domestic arrears and consolidated government debt.
  - Domestic arrears recorded: RWF 34.4 billion (0.7 percent of GDP) at end-2012.
- Structural benchmarks:
  - All but one met; exception: technical specifications for IFMIS, target reset to end-September 2013.
- Reserve money program:
  - Reserves improved since November 2012 with reserve money band framework.
  - End-December 2012 reserve money target achieved.

### Recent economic developments and key statistics
- Growth, inflation, and sectoral performance:
  - 2012 real GDP growth: 8 percent.
  - Service sector expansion: communication and transport activities expanded by 19 percent.
  - Construction growth: 15 percent.
  - Private sector credit expansion in 2012: 34 percent (text also notes 33.8 percent in a related paragraph).
  - Agricultural production (food crops): grew by 3 percent.
  - Export crops (tea and coffee): declined by 9 percent.
  - Headline inflation December 2012: 3.9 percent year-on-year.
  - Core inflation December 2012: 2.5 percent year-on-year.
  - March 2013 inflation: headline 3.3 percent; core 4.8 percent.
  - Depreciation of Rwandan franc in 2012: more than 5 percent since beginning of 2012; specific figure later stated as 4.5 percent over 2012 with comparison 1.6 percent previous year.
  - Spread between official and foreign exchange bureaus: about 5 percent emergence in late 2012.
  - Loss of reserves equivalent to about 1.1 months of prospective imports (due to aid suspensions and import growth).
- External sector:
  - Current account deficit: 11.4 percent of GDP in 2012.
  - Reserve position: end-2013 nominal reserves expected a little higher than end-2012; NBR target to keep official reserves above a minimum level of 4 months of prospective imports (CIF).

### Fiscal developments and measures
- July-December 2012:
  - Domestic revenue collections: RWF 346.2 billion (marginally higher than projected).
  - Grant disbursements shortfall: RWF 44.4 billion (0.9 percent of GDP) lower than October assumption.
    - Expected budget support from DFID and the Netherlands: RWF 25.3 billion not disbursed.
    - Project grants shortfall: RWF 19.2 billion.
  - Total expenditure and net lending: RWF 596.8 billion (exceeded October target by RWF 13 billion).
  - Transfers to public institutions and local governments exceeded target by RWF 31.3 billion.
  - As a result of shortfalls and overspending:
    - Government used central bank overdraft facility.
    - Unable to retire some short-term treasury bills as planned.
    - Recorded domestic arrears RWF 34.4 billion (0.7 percent of GDP) at end-2012.
  - Net domestic financing: negative by RWF 46.8 billion (reflecting accumulation of deposits in project accounts).
  - Consolidated domestic debt marginally exceeded target due to use of overdraft and rollover of treasury bills.
- Euro bond issuance (late April):
  - Proceeds: US$ 400 million = RWF 259.4 billion.
  - Use of proceeds:
    - Retire expensive government-guaranteed loans for Rwandair and Kigali Conference Centre.
    - Fund completion of Kigali Convention Centre.
    - Fund ongoing work on Nyabarongo hydro-power project (to generate 28 megawatts by end-June 2014).
  - These expenditures included in FY2013/2014 fiscal framework.
- FY2013/2014 fiscal framework and revenue mobilization:
  - Disbursements of budget support for FY2012/13 now expected RWF 54.2 billion (1.2 percent of GDP) lower relative to original budget.
  - Government committed to a comprehensive revenue mobilization plan by end-June 2013 (new structural benchmark).
  - Tax revenue projection for FY2013/2014:
    - Increase from RWF 641.2 billion (13.7 percent of GDP) to RWF 749.1 billion (13.9 percent of GDP).
  - Revenue measures to yield revenue amounting 1 percent of GDP in 2013/2014:
    - Review of Investment Code—removal of exemptions regarding duties on importation of construction materials and employment tax discounts.
    - Introduce a royalty tax on mining.
    - Renegotiate double taxation avoidance agreement with Mauritius.
    - Enhance VAT collection with implementation of electronic billing machines.
  - Expenditure and deficit projections:
    - Total expenditure and net lending projected at 29.2 percent of GDP (1.3 percentage points lower than 30.4 percent of GDP in 2012/2013).
    - Capital spending for FY2013/2014: RWF 744.5 billion (13.8 percent of GDP) vs RWF 625 billion (13.4 percent of GDP) in 2012/2013.
    - Overall deficit (including grants) projected to decline from 5.9 percent of GDP in 2012/2013 to 5.4 percent of GDP in 2013/2014.
    - New domestic cash finance for 2013/2014 budget: RWF 30.3 billion (0.6 percent of GDP).

### Monetary policy and exchange rate stance
- NBR policy stance:
  - Continue prudent monetary policy to limit risk of monetary inflation.
  - Key repo rate: unchanged at 7.5 percent since May 2012.
  - Reserve money program: flexible framework of a reserve money band of +/- 2 percent around a central target; PSI QAC on reserve money remains the upper limit of the band.
  - Reserve money target: achieved at end-December 2012.
  - Broad money growth: 14 percent to end-December 2012 (versus projection of 16.5 percent).
  - Net foreign assets declined by 17.2 percent in 2012 as NBR attempted to meet market demand for foreign exchange.
  - Private sector credit growth is planned to be restrained in 2013—projected to be less than half of that in 2012.
- Exchange rate policy:
  - Exchange rate will remain market-driven.
  - NBR to allow greater exchange rate flexibility by strengthening implementation of the exchange rate corridor system.
  - Objective: bring spread between official and market exchange rates to below 2 percent (the level prevailing before mid-2012).
  - Maintain official reserves above minimum level of 4 months of prospective imports (CIF).

### Financial sector reforms and supervisory actions
- Regulatory and supervisory initiatives:
  - Review NBR Law and banking law; prepare a deposit insurance law.
  - Update related regulations and guidance; develop new regulations and supervisory tools.
  - Continue off-site surveillance and on-site examinations under risk-based supervision.
  - Quarterly prudential meetings with banks; ten (10) on-site inspections planned for 2013.
  - Strengthen capacity for bank examiners through recruitment and training.
- SACCO consolidation:
  - Consolidate SACCOs into a cooperative bank through a two-phase plan:
    - Step 1: Consolidate SACCOs at district level by end December 2013.
    - Step 2: Consolidate all SACCOs to form a cooperative bank at national level by end December 2014.
  - Roadmap includes enhancing institutional capacity and management information systems (MIS), and automation of operations.

### Program adjustments and next steps
- MEFP update covers performance through end-December 2012 and policies for 2013 and FY2013/14.
- New targets and benchmarks:
  - Table 1 (in MEFP) contains new end-June 2013 QACs for a seventh review and new indicative targets for end-June and end-December 2013.
  - Table 2 (in MEFP) includes the new structural benchmark (comprehensive revenue mobilization plan by end-June 2013) and the reset IFMIS specification benchmark (end-September 2013).
- Government commitments:
  - Will take measures to correct issues leading to slippages (reverse domestic arrears; allow greater exchange rate flexibility; preserve adequate international reserves).
  - Will consult with the IMF before adopting measures that change the policies in the MEFP.
  - Will provide requested information to IMF on policy implementation and program progress.
  - Expects the next review to take place before end-December 2013.
  - Authorizes publication and distribution of the letter and attachments.

*Letter of Intent and attached MEFP, May 24, 2013.*

### 16. EDPRS2. The Government just finalized the development of the Second Economic

### 16. EDPRS2. The Government just finalized the development of the Second Economic

### EDPRS2 objectives and thematic priorities
- EDPRS2 will guide Rwanda’s medium-term development aspirations over the next five years beginning in July 2013 and ending in June 2018.
- Key ambitions:
  - Accelerating poverty reduction from its current level of 44.9 percent to less than 30 percent of the population.
  - Generating rapid, sustainable and inclusive growth.
- EDPRS2 targets four thematic areas: Economic Transformation, Rural Development, Productivity and Youth Employment and Accountable Governance.
- EDPRS2 emphasizes that the emergence of a vibrant export oriented private sector will be the driver of development over the next five years.

### Quantitative assessment criteria and indicative targets (selected outcomes and assessments)
- Net foreign assets of the NBR at program exchange rate (floor on stock)
  - Target (Dec. 2012): 618.8
  - Adjusted targets: 418.4
  - Actual (Dec. 2012): 396.1
  - Difference: -22.3
  - Status: Not met
  - Targets (June 2013): 542.7
  - Targets (Dec. 2013): 483.6
- Reserve money (ceiling on stock) (upper bound)
  - Dec. 2012 Target: 188.4
  - Dec. 2012 Actual: 179.4
  - Difference: -9.0
  - Status: Met
  - Targets (June 2013): 203.9
  - Targets (Dec. 2013): 218.0
- Reserve money (ceiling on stock) (other bounds listed)
  - Reserve money (ceiling on stock): 184.7; 199.9; 213.7
  - Reserve money (ceiling on stock) (lower bound): 181.0; 195.9; 209.5
- Net domestic financing (ceiling on flow)
  - Dec. 2012 Target: -60.0
  - Adjusted targets: 98.0
  - Actual (Dec. 2012): 91.6
  - Difference: -6.4
  - Status: Met
  - Targets (June 2013): -58.4
  - Targets (Dec. 2013): -10.9
- New nonconcessional and government guaranteed external debt (US$ millions) (ceiling on stock)
  - Dec. 2012 Target: 605.0
  - Adjusted targets: 255.0
  - Actual (Dec. 2012): 239.5
  - Difference: -15.5
  - Status: Not met
  - Targets (June 2013): 655.0
  - Targets (Dec. 2013): 655.0
- External payment arrears (US$ millions) (ceiling on stock)
  - 0.0; 0.0; 0.0; 0.0
  - Status: Met (note: continuous assessment criterion met at end-December 2012 but breached by issuance of a US$400 million euro bond in April 2013)
- Indicative targets
  - Domestic revenue collection (floor on flow)
    - Dec. 2012: 653.5
    - Adjusted targets: 653.5
    - Actual (Dec. 2012): 653.8
    - Difference: 0.3
    - Status: Met
    - Targets (June 2013): 361.5
    - Targets (Dec. 2013): 769.8
  - Net accumulation of domestic arrears (ceiling on flow)
    - Dec. 2012: -9.8
    - Adjusted targets: -9.8
    - Actual (Dec. 2012): 28.6
    - Difference: 38.4
    - Status: Not met
    - Targets (June 2013): -42.4
    - Targets (Dec. 2013): -47.0
  - Consolidated domestic debt of public sector (ceiling on stock, eop)
    - Dec. 2012 Target: 189.3
    - Adjusted targets: 208.4
    - Actual (Dec. 2012): 244.9
    - Difference: 36.5
    - Status: Not met
    - Targets (June 2013): 313.8
    - Targets (Dec. 2013): 260.8
  - Total priority spending (floor on flow)
    - Dec. 2012 Target: 497.0
    - Adjusted targets: 497.0
    - Actual (Dec. 2012): 572.7
    - Difference: 75.7
    - Status: Met
    - Targets (June 2013): 280.9
    - Targets (Dec. 2013): 569.3
- Memorandum items (selected)
  - Total budget support (US$ millions): 422.9; 391.4; -31.5; 260.3; 460.9
  - Budget support grants (US$ millions): 409.5; 377.9; -31.6; 246.8; 447.4
  - General budget grants (US$ millions): 279.5; 231.0; -48.5; 146.8; 311.1
  - Grants from Global Fund (US$ millions): 130.0; 146.9; 16.9; 100.0; 136.3
  - Budget support (loans, US$ millions): 13.4; 13.4; 0.0; 13.5; 13.5
  - Euro bond (US$ millions): 350.0; 0.0; 400.0; 400.0
  - Unused euro bond proceeds (US$ millions): 180.0; 70.0
  - Encumbered reserve assets (US$ millions): 0.0; 70.2; 70.2; 0.0; 0.0
- Sources: Rwandan authorities and IMF staff estimates and projections.

### Structural benchmarks, status, and rationale (selected)
- PFM
  - 1. Complete the determination of the detailed system and technical requirements for the Integrated Financial Management Information System.
    - Target date: End-April 2013
    - Macroeconomic rationale: To improve budget preparation, implementation and reporting
    - Status: Not met. Re-phased to end-September 2013
- Fiscal Performance
  - 2. 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. Initially the quarterly budget execution reports will exclude foreign-financed projects.
    - Target date: Continuous, starting mid-May 2011
    - Rationale: To improve communication of fiscal performance to stakeholders.
    - Status: Met
  - 3. Introduce electronic tax registry to improve issuance of VAT invoices by taxpayers.
    - Target date: End-January 2013
    - Rationale: To improve VAT buoyancy.
    - Status: Met
  - 4. Submit to cabinet revised investment code with a view to streamlining exemptions
    - Target date: End-November 2012
    - Rationale: To improve revenue performance.
    - Status: Met
- Financial sector
  - 5. Complete the rating of SACCOs and selection of those that quality for consolidation at district level.
    - Target date: End-December 2012
    - Rationale: To expedite supervision of the Umurenge SACCOs
    - Status: Met
- External sector
  - 6. Submit to the Industrial Development and Export Council a financing plan for the National Export Strategy.
    - Target date: End-December 2012
    - Rationale: To widen the export base of Rwanda
    - Status: Met
- New structural benchmark for seventh review
  - 7. MINECOFIN/RRA to prepare a medium-term revenue mobilization plan.
    - Target date: End-June 2013
    - Rationale: To increase tax revenue mobilization.

### Technical Memorandum of Understanding (TMU) — scope, targets and reporting
- Purpose: Defines quantitative targets described in the MEFP for the period June 30, 2010–January 31, 2014 supported by the IMF Policy Support Instrument (PSI); supersedes the TMU issued in Country Report No. 13/77.
- Quantitative program assessed through assessment criteria (AC) and indicative targets (IT).
- AC apply to indicators for June 30, 2013 (test date) throughout the program period; other dates are IT.
  - AC indicators include:
    - Floor on stock of net foreign assets (NFA) of the National Bank of Rwanda (NBR)
    - Ceiling on stock of reserve money
    - Ceiling on flow of net domestic financing (NDF) of the central government
    - Ceiling on contracting or guaranteeing of new non-concessional external debt by the public sector
    - Ceiling on stock of external payment arrears of the public sector
  - IT indicators include:
    - Floor on flow of domestic revenue collection of the central government
    - Ceiling on flow of net accumulation of domestic arrears of the central government
    - Ceiling on stock of consolidated domestic debt of the public sector
    - Floor on flow of priority spending
- Assessment criteria on contracting or guaranteeing of new non-concessional external debt and stock of external payment arrears are applicable on a continuous basis for the duration of the program.

### Program exchange rates (end-December 2011 rates applied for 2013)
- Rwanda Franc (per US$): 604.1410
- Euro: 1.2866
- British Pound: 1.5371
- Japanese Yen (per US$): 77.7899
- SDR: 1.5348

### Fiscal sector coverage and specific target definitions (selected)
- Institutional coverage: Central government fiscal operations comprise the treasury and line ministries (referred to as the government).
- Ceiling on net domestic financing (NDF)
  - Measurement: Ceiling for June 30, 2013 is cumulatively measured from December 31, 2012 (Table 1).
  - Definition: Change in the sum of (i) net banking sector credit to the government and (ii) non-bank holdings of government domestic debt.
  - Net banking sector credit to government:
    - Consolidated credit to the government from the banking system (NBR and commercial banks) as recorded in the monetary survey, including credit to provinces and districts.
    - Includes outstanding consolidated government debt held by banking system, including government debt to the NBR amounting to RWF 38.6 billion incurred as a result of the overdraft to the prewar government and the 1995 devaluation, as well as the current overdraft with the NBR.
    - Excludes treasury bills issued by the NBR for monetary policy purposes, the proceeds of which are sterilized in deposits held as other NBR liabilities.
    - Less total government deposits with the banking system (main treasury account, line ministries, fund for assistance to genocide survivors, Rwanda Revenue Authority, electoral commission, demobilization commission, fonds routier, privatization account, and accounts of any other autonomous public enterprises and public agencies over which the government has direct control).
    - Excludes government deposits over which the central government does not have direct control (project accounts, Global Fund money meant for the private sector, counterpart funds, and fonds publics affectés).
  - Non-bank holdings of government domestic debt: Non-bank holdings of treasury bills, domestic and non-resident bonds, old development bonds (pre-1994 debt), new development bonds, and other accounts receivable.
  - Adjusters to NDF:
    - Upward adjustment by amount of any shortfall between actual and programmed budgetary loans and grants, up to a maximum of US$80 million, evaluated in Rwandan francs at the program exchange rate.
    - Downward adjustment by the extent to which the unused proceeds of the US$400 million euro bond issued in April 2013 exceed US$180 million by end-June 2013 and by US$70 million by end-December 2013 (evaluated in Rwandan francs at the program exchange rate).
    - Upward adjustment by amount of expenditure for food imports in the case of a food emergency.
  - Reporting requirement: Data on NDF (showing separately treasury bills and government bonds outstanding, other government debt, and central government deposits) transmitted monthly within five weeks from end of each month.
- Floor on flow of domestic revenues
  - Measurement: Floor for June 30, 2013 and December 31, 2013 is cumulatively measured from December 31, 2012.
  - Definition: Total government revenue (tax and non-tax revenues) per the central government fiscal operation table, excluding external grants and privatization receipts.
  - Reporting: Detailed data on domestic revenues transmitted monthly within five weeks of end of each month.
- Floor on priority expenditure
  - Measurement: Floor for June 30, 2013 and December 31, 2013 is cumulatively measured from December 31, 2012; other dates are IT.
  - Definition: Sum of recurrent expenditures, domestically-financed capital expenditures, and net lending identified as priority in line with the EDPRS; monitored through the SIBET expenditure management system.
  - Reporting: Data on priority expenditure transmitted monthly within five weeks of end of each month.
- Net accumulation of domestic arrears of the government
  - Measurement: Ceiling for June 30, 2013 and December 31, 2013 is cumulatively measured from December 31, 2012.
  - Definition: Difference between gross accumulation of new domestic arrears (payment orders less actual payments) and gross repayment of any arrears outstanding since the beginning of the year (including repayment of float and older arrears).
  - Reporting: Data on repayment of domestic arrears and remaining previous year’s stock of arrears transmitted monthly within five weeks of end of each month.

### Limits on external debt and definitions
- Ceiling on contracting or guaranteeing of new non-concessional external debt by the public sector applies continuously from end-June 2010 to end-January 2014 (see Table 1).
  - Exclusions: swap agreement of US$50 million signed in November 2009 between the NBR and the IFC; loan of US$13.1 million for purchase of two airplanes in 2009; euro 8 million loan contracted by BRD from the European Investment Bank in September 2011.
  - Excludes non-concessional borrowing by the Bank of Kigali (assumed not to seek or be granted a government guarantee).
  - Ceiling applies to private debt with official guarantees and future swaps involving foreign currency loans guaranteed by the public sector.
- Definition of public sector: 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 shares or ability to determine corporate policy). Excludes the Bank of Kigali.
- Definition of guarantee: Any explicit legal obligation of the public sector to service a debt in case of nonpayment by the debtor, or any implicit legal or contractual obligation to finance any shortfall.
- Definition of concessionality: Debt is concessional if it includes a grant element of at least 35 percent, where grant element = (nominal value – present value) / nominal value. Present value discounted using OECD CIRRs:
  - For debt maturity >= 15 years: ten-year-average CIRR used.
  - For debt maturity < 15 years: six-month average CIRR used.
  - Margins added to averages: 0.75 percent for repayment periods < 15 years; 1 percent for 15–19 years; 1.15 percent for 20–29 years; 1.25 percent for 30 years or more.
- Definition of debt for QAC: Follows point 9 of Guidelines on Performance Criteria with Respect to External Debt (effective December 1, 2009) covering loans, suppliers' credits, leases, and commitments contracted or guaranteed for which value has not been received; includes arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligations that constitute debt.

*Source: Rwandan authorities and IMF staff estimates and projections, Technical Memorandum of Understanding (May 24, 2013).*

### 27. A continuous assessment criterion applies to the non-accumulation of payment arrears on

### _cr13177 - 27. A continuous assessment criterion applies to the non-accumulation of payment arrears on

### Continuous assessment criterion: external payment arrears
- A continuous assessment criterion applies to the non-accumulation of payment arrears on external debt contracted or guaranteed by the public sector.
- Definition: External payment arrears consist of external debt service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements, but shall exclude arrears on obligations that are subject to rescheduling.

### Consolidated Domestic Debt of the Public Sector (DD)
- For program purposes, DD excludes treasury bills issued by the NBR for monetary policy purposes.
- The ceiling on DD applies to domestic commitments contracted or guaranteed by the public sector, including private debt for which official guarantees have been extended implicitly or explicitly.
- Authorities obligation: inform Fund staff of any changes in debt position of public sector entities.
- Adjusters:
  - In the case of a shortfall in programmed budgetary loans and grants (per paragraph 11), the ceiling on consolidated domestic debt of public sector will be adjusted upward by the same amount as the increase in the ceiling in the NDF, but capped per paragraph 11.
  - The ceiling on the DD will be adjusted upward by the amount of expenditure for food imports in the 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, will be transmitted on a monthly basis within five weeks of the end of each month.

### Targets for monetary aggregates — Net foreign assets (NFA) of the National Bank of Rwanda (NBR)
- A floor applies to the NFA of the NBR for June 30, 2013 and December 31, 2013.
- Definition: NFA of the NBR in Rwandan francs is defined, consistent with the SDDS template, as external assets readily available to, or controlled by, the NBR net of its external liabilities. Pledged or otherwise encumbered reserve assets (including swaps) are excluded.
- Conversion rules: Foreign assets and foreign liabilities in U.S. dollars are converted to Rwandan francs by using the U.S. dollar/Rwanda franc program exchange rate. Foreign assets and liabilities in other currencies are converted to U.S. dollars by using the actual end-of-period U.S. dollar/currency exchange rate.
- Foreign liabilities include, inter alia, use of IMF resources (CCFF and post-conflict emergency assistance purchases and SAF/ESAF/ECF disbursements).
- Adjusters:
  - The floor on NFA will be adjusted downward by the amount of any shortfall between actual and programmed budgetary loans and grants per Table 1. Quantitative Assessment Criteria and Indicative Targets of the MEFP. This adjustment will be capped at the equivalent of US$80 million, evaluated in Rwanda francs at the program exchange rate.
  - The floor on NFA will be adjusted downward (upward) by the extent to which actual encumbered reserve assets are lower (higher) than programmed encumbered reserve assets, evaluated in Rwandan francs at the program exchange rate.
  - The floor on NFA will be adjusted upward by the extent to which in Rwandan francs at the program exchange rate unused proceeds of the US$400 million euro bond issued in April 2013 exceed US$180 million by end-June 2013 and by US$70 million by end-December 2013.
  - The floor on NFA will be adjusted downward by the amount of expenditure for food imports in the case of a food emergency, evaluated in Rwanda francs at the program exchange rate.
- Reporting requirement: 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, including breakdown of assets that are pledged or encumbered. Transmission will include daily and weekly data on the NBR’s foreign exchange liabilities to commercial banks (including required reserves with the NBR) and the exchange rate used for their conversion into Rwanda francs will be shown separately.

### Reserve money
- A ceiling applies to the stock of reserve money for June 30, 2013 and December 31, 2013 as indicated in Table 1. Quantitative Assessment Criteria and Indicative Targets of the MEFP.
- The ceiling is the upper bound of a reserve money band (set at+/- 2 percent) around a central reserve money target.
- Calculation: The stock of reserve money 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.
- Definition: Reserve money is the sum of currency in circulation, commercial banks’ reserves, and other nonbank deposits at the NBR.
- Adjuster:
  - 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: Data on reserve money will be transmitted on a weekly basis within seven days of the end of each week. This 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 notification requirements
- For program monitoring, the Government of Rwanda will provide the data listed in TMU 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.
- Notification requirements:
  - 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 (including customs and tax laws, wage policy, and financial support to public and private enterprises).
  - The authorities will similarly inform the IMF staff of any non-concessional 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.
- Contact/method: The authorities will on a regular basis submit information to IMF staff with the frequency and submission time lag as indicated in TMU Table 1. The information should be mailed electronically to the Fund. (email: afrrwa@imf.org).

*Source: _cr13177 - 27. A continuous assessment criterion applies to the non-accumulation of payment arrears on (IMF staff report excerpt).*

### Appendix Table 4. Public Sector Debt Sustainability Framework,

### Appendix Table 4. Public Sector Debt Sustainability Framework, Baseline Scenario, 2009–32

### PV of Debt-to-GDP Ratio — Projections
- Years (implicit columns): 2012 2013 2014 2015 2016 2017 2022 2032
- Baseline: 26 24 24 24 25 26 26 24

A. Alternative scenarios
- A1. Real GDP growth and primary balance are at historical averages: 26 20 18 17 17 17 14 11
- A2. Primary balance is unchanged from 2012: 26 23 22 23 25 27 32 38
- A3. Permanently lower GDP growth 1/: 26 24 24 25 26 28 32 42

B. Bound tests
- B1. Real GDP growth is at historical average minus one standard deviations in 2013-2014: 26 25 25 26 28 29 32 33
- B2. Primary balance is at historical average minus one standard deviations in 2013-2014: 26 22 20 21 22 23 24 23
- B3. Combination of B1-B2 using one half standard deviation shocks: 26 21 19 20 22 23 25 26
- B4. One-time 30 percent real depreciation in 2013: 26 31 29 29 29 29 29 28
- B5. 10 percent of GDP increase in other debt-creating flows in 2013: 26 33 31 31 32 32 31 27

### PV of Debt-to-Revenue Ratio 2/ — Projections
- Years (implicit columns): 2012 2013 2014 2015 2016 2017 2022 2032
- Baseline: 102 94 92 99 129 101 106 96

A. Alternative scenarios
- A1. Real GDP growth and primary balance are at historical averages: 102 80 68 65 68 68 60 46
- A2. Primary balance is unchanged from 2012: 102 88 84 88 90 81 05 129 151
  (Note: original sequence appears as "102288848898105129151")
- A3. Permanently lower GDP growth 1/: 102 94 93 95 103 108 127 162

B. Bound tests
- B1. Real GDP growth is at historical average minus one standard deviations in 2013-2014: 102 96 97 100 109 113 127 130
- B2. Primary balance is at historical average minus one standard deviations in 2013-2014: 102 85 78 80 87 91 89 92
- B3. Combination of B1-B2 using one half standard deviation shocks: 102 83 74 77 85 90 100 1101
  (Note: original sequence appears as "1028374778590101101")
- B4. One-time 30 percent real depreciation in 2013: 102 102 120 114 111 115 116 119 111
  (Note: original sequence appears as "10202120114111115116119111")
- B5. 10 percent of GDP increase in other debt-creating flows in 2013: 102 127 121 120 125 126 125 107
  (Note: original sequence appears as "102127121120125126125107")

### Debt Service-to-Revenue Ratio 2/ — Projections
- Years (implicit columns): 2012 2013 2014 2015 2016 2017 2022 2032
- Baseline: 7 12 3 34 4 76  (original line: "Baseline712334476")

A. Alternative scenarios
- A1. Real GDP growth and primary balance are at historical averages: 7 12 3 33 3 53
- A2. Primary balance is unchanged from 2012: 7 12 3 34 47 8
  (Note: original sequence appears as "71233447 8")
- A3. Permanently lower GDP growth 1/: 7 12 3 44 8 8

B. Bound tests
- B1. Real GDP growth is at historical average minus one standard deviations in 2013-2014: 7 12 3 44 4 48 7
- B2. Primary balance is at historical average minus one standard deviations in 2013-2014: 7 12 3 33 3 37 6
- B3. Combination of B1-B2 using one half standard deviation shocks: 7 12 3 33 3 37 6
- B4. One-time 30 percent real depreciation in 2013: 7 16 45 55 11 10
  (Note: original sequence appears as "71645551110")
- B5. 10 percent of GDP increase in other debt-creating flows in 2013: 7 12 4 44 4 87

Sources: Country authorities; and staff estimates and projections.
1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.
2/ Revenues are defined inclusive of grants.

*RWANDA — INTERNATIONAL MONETARY FUND 57*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13177.pdf_