## _cr13372

## Source details

**Canonical URL:** [_cr13372](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13372.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13372.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13372.pdf.json)

---

### Experiences and lessons from the expiring PSI
- Rwanda achieved average annual economic growth in excess of 8 percent over the last decade, with low inflation and modest public debt, supported by significant inflows of foreign aid.
- EDPRS 2 priorities: (i) economic transformation; (ii) rural development; (iii) productivity and youth employment; (iv) accountable governance; regional integration through the EAC emphasized.
- Authorities requested a successor PSI to maintain policy dialogue and signal policy strength to donors and investors in absence of a balance of payments need.
- Key lessons:
  - Macroeconomic policy implementation was generally strong; policy response to the global crisis and the aid shock during FY2012/13 was appropriate.
  - Prioritizing reforms is important; significant progress on public financial management, transparency, and budget execution reporting.
  - Fiscal efforts on revenue mobilization hampered by low compliance and a narrow tax base.
  - Pace of reforms must be calibrated to implementation capacity; monetary framework improvements and exchange rate flexibility require capacity building at NBR; financial sector focus on access to services and supervisory capacity.

### Recent economic developments (highlights)
- Growth and inflation:
  - Real GDP growth slowed to 5.9 percent year-on-year in the first half of 2013.
  - Twelve-month headline inflation: 5.1 percent in September; core inflation (excluding fresh foods and fuels): 3.3 percent.
- Balance of payments and reserves:
  - Export volumes for major mineral exports rose; seven new mines started up in 2013.
  - Foreign exchange reserves stabilized at about 3.5 months of prospective imports.
- Fiscal outturn for FY2012/13 (percent of GDP; source Text Table 1):
  - Revenue and grants: 24.6 23.9 -0.7
  - Revenue: 15.1 16.0 0.9
  - Grants: 9.4 7.9 -1.5
  - Total expenditure and net lending: 30.5 29.0 -1.5
  - Current expenditure: 13.6 13.8 0.2
  - Capital expenditure: 13.4 12.3 -1.1
  - Net lending: 3.5 3.0 -0.6
  - Change in arrears: -0.2 -0.2 0.0
  - Overall deficit (cash basis): -6.1 -5.3 0.8
- Monetary conditions:
  - Broad money growth decelerated to 17 percent (year-on-year) at end-August 2013.
  - Private sector credit growth slowed from 35 percent at end-2012 to about 13 percent at end-August 2013.
  - Rwandan franc depreciated about 4 percent through September 2013.
  - Resumption of budget support and moderate depreciation eased FX market pressures.

### Program performance under the expiring PSI
- All quantitative assessment criteria (QACs) were met except the ceiling on non-concessional borrowing (NCB).
- All indicative targets and structural benchmarks (SBs) were met.
- Non-observance of the NCB ceiling when Rwandair contracted a US$50.7 million external loan in July; proceeds used to repay government debt.
- Authorities committed to reinforce procedures requiring Ministry approval before public entities contract foreign loans and to adhere to consultation clauses; staff recommended a waiver.

### Near-term outlook and risks
- Growth projections:
  - Projected growth for 2013 revised down to 6.6 percent, assuming pick-up in construction and services as government spending normalizes after aid resumption.
  - Growth for 2014 projected at 7.5 percent, supported by recovery in agriculture and pick-up in services.
- Inflation and reserves:
  - Headline inflation projected to rise to 6.5 percent by end-2013 and to decline gradually to 6 percent in 2014.
  - Current account deficit (including grants) estimate for 2013 revised down by about 1 percentage point of GDP; reserve cover projected at 3.8 months of prospective imports by end-2013.
- Main downside risks:
  - Lower-than-assumed donor inflows relative to GDP from DRC concerns or donor-country budgetary pressures could adversely affect public investment and growth.
  - Continued global weakness could hamper export expansion and diversification.

### Policy priorities and medium-term macroeconomic framework
- Agreed policy priorities:
  - Maintain a sustainable fiscal position while creating fiscal space by enhancing domestic revenue mobilization and pursuing further PFM reforms.
  - Modernize the monetary policy framework to ensure low and stable inflation.
  - Enhance access to credit and deepen the financial sector while reducing vulnerabilities through stronger banking supervision.
  - Preserve external stability, including debt sustainability.
- Medium-term projections agreed with authorities:
  - Real GDP growth averaging 7.5 percent annually during the program period.
  - Annual headline inflation converging to the NBR’s medium-term target of 5 percent.
  - Foreign reserves rising gradually to 4.1 months of prospective imports by the end of the PSI.
- Assumptions: soft landing in aid—aid recovers in FY2013/14 from depressed FY2012/13 levels, then declines gradually relative to GDP with increased uptake of concessional project loans.

### Aid profile and assumptions (Box 2 key figures)
- Historical reliance: grants averaged more than 11 percent of GDP per annum and covered more than 40 percent of total spending during early 2000s.
- FY2012/13–FY2015/16 financial assistance (percent of GDP):
  - Grants: 7.9 8.8 7.8 6.5
    - Budget support grants: 4.1 3.8 3.7 4.0
    - Capital grants: 3.8 5.0 4.1 2.5
  - Loans: 2.1 2.3 3.6 3.4
    - Budget support loans: 0.4 0.0 0.0 0.0
    - Project loans 1/: 1.8 2.3 3.6 3.4
  - Total financial assistance: 10.1 11.1 11.4 9.9
  - 1/ Excludes euro bond of US$400 million in April 2013.
- Authorities expect budget and capital grants to recover in FY2013/14 and then be broadly stable nominally but declining relative to GDP; uptake of project loans planned to increase.

### Private sector development and export promotion (Box 3)
- Private sector strategy: reduce costs of doing business; improve infrastructure (energy, EAC connectivity); increase access to finance; support skills development; investment promotion for FDI; entrepreneurship; credit expansion via guarantee schemes; regulatory improvements; facilitate market access by reducing trade barriers.
- Export promotion measures:
  - Revise Mining Law to allow longer-term concessions and merge prospecting and exploration licenses.
  - Increase tea and coffee production via tea expansion, land consolidation, new factories, and productivity improvements.
  - Target export-oriented investment in horticulture, milling, and cement via PPPs.
  - Establish integrated logistics via PPPs, build off-dock container depots, finalize one-stop border posts, tackle non-tariff barriers.
- Staff emphasized prioritization: proceed only with high economic return infrastructure projects; authorities agreed to feasibility studies for regional oil pipeline, railway, new international airport and to consider PPPs.

### Revenue mobilization strategy (Box 5 and MEFP highlights)
- Headline tax revenue-to-GDP ratio assumed to rise from 14.2 percent in FY2012/13 to 17.7 percent in FY2015/16 under the new PSI.
- Net revenue mobilization effort about 2.4 percentage points of GDP during PSI.
- Revenue administration measures:
  - RRA to strengthen tax compliance, full rollout of electronic billing machines and comprehensive use of IT.
- Tax policy measures (timing/content):
  - Initial (supplementary budget in December): raise excise tax on mobile airtime; introduce royalty tax on mining.
  - FY2014/15: broaden VAT base via revision of exemption and zero-rating schedules; prepare tax expenditures review.
  - FY2015/16: introduce comprehensive tax regimes for agriculture and mining; improve property taxation; request IMF TA.
- Tax revenue composition (percent of GDP):
  - Tax revenue: 14.2 (FY2012/13), 15.1 (FY2013/14), 16.2 (FY2014/15), 17.7 (FY2015/16)
    - Direct taxes: 6.1, 6.4, 6.8, 7.5
    - Taxes on goods and services: 6.8, 7.5, 8.3, 9.1
    - Taxes on international trade: 1.2, 1.1, 1.1, 1.1
  - Annual change (net of local government taxes and taxes on project spending): 0.9 (FY2012/13), 1.1 (FY2013/14), 1.5 (FY2014/15)

### Public financial management and spending priorities
- Government adopted a comprehensive five-year PFM plan; three priority areas:
  - Scale up IFMIS implementation.
  - Strengthen PFM systems at sub-national level.
  - Enhance training, professionalization, and capacity building across PFM disciplines.
- Spending commitments:
  - Control current spending to leave room for capital projects.
  - Capital expenditure expected to peak in 2014/15 reflecting strategic investments (including energy).
  - Protect social programs for poverty reduction and employment generation.
  - Transfers to electricity supply company expected to decline as new generation capacity comes online.

### Monetary policy modernization and liquidity management (Box 6 measures)
- Monetary policy target: achieve 5 percent inflation over the medium term.
- Reserve money remains anchor; shift to quarterly average for reserve money (within band) for flexibility.
- Measures to strengthen framework and transmission:
  - Issue treasury bills as monetary policy instrument; develop bond issuance program; extend repo maturities; develop secondary market.
  - Activate collateral transfer across banks; promote horizontal repos; define intervention mechanism to avoid daily surplus/deficit.
  - Develop and refine inflation forecasting and macro models; expand trained staff.
  - Build capacity: inform commercial banks of changes; support Treasurers’ Association training.
  - Publish quarterly inflation report.
  - Improve FX market: allow official exchange rate to move more flexibly within corridor; improve communication and articulate intervention procedures.
- NBR will issue treasury bills in consultation with the Treasury to absorb longer-term liquidity.

### Financial sector: access to credit and stability measures
- Banking system remains strong despite a recent increase in NPLs; most solvency, liquidity, and profitability indicators meet/exceed prudential norms.
- NBR requested banks with NPLs above 5 percent to submit recovery plans and set up dedicated units; improve collateral quality and credit underwriting.
- Regulatory and supervisory reforms:
  - Planned SACCO consolidation in 2015.
  - New banking law introducing general provisioning; new deposit insurance law; amendments to insurance law; law to liberalize private pensions.
  - Program to promote training and retention of bank supervisors; integrate on-site and off-site supervision next fiscal year.
  - Participation in supervisory colleges for cross-border bank inspections.
  - Implement AML/CFT recommendations.
- Financial deepening challenges:
  - Credit-to-GDP is the lowest in the EAC.
  - FSDP 2 aims to tackle impediments to intermediation and increase saving and investment opportunities.
  - NBR plans bond issuance and longer-term treasuries to support yield curve and secondary market.
  - Authorities expect three companies to list by end of fiscal year (two listed now); consider cross-listing with Nairobi Stock Exchange.

### Debt sustainability analysis (DSA) and implications
- Joint IMF-World Bank DSA: Rwanda’s debt profile improved; risk of debt distress judged “low”.
- CPIA classifies Rwanda as “strong”, raising assessment thresholds.
- Discount rate revised to 5 percent.
- All DSA indicators remain below thresholds under all scenarios; PV of external debt-to-exports remains below threshold even under extreme shock.
- Scenarios of additional non-concessional borrowing examined:
  - Modest recourse: US$250 million in 2014 (3 percent of 2014 GDP).
  - Higher recourse: US$500 million in 2014 (6 percent of GDP).
  - Phased program: US$1 billion spread equally over 2014–18.
  - Result: None of the indicative thresholds breached in scenarios examined; space to tap commercial credit is modest.
- Policy recommendations from DSA:
  - Continue caution in non-concessional borrowing; prioritize and sequence projects with strong cost-benefit analyses.
  - Avail concessional financing where possible; use low-risk rating to mobilize concessional sources.
  - Maintain prudent medium-term debt management strategy and careful project/financing choices.

### Macro and medium-term projections (selected numeric highlights)
- Real GDP growth projected to average about 7.5 percent annually during program period.
- Annual headline inflation converging to 5 percent (NBR medium-term target).
- Foreign reserves rising to 4.1 months of prospective imports by end of PSI.
- Fiscal framework (percent of GDP; Text Table 2 highlights):
  - Revenue and grants: 23.9 (2012/13), 25.2 (2013/14), 25.3 (2014/15), 25.4 (2015/16), 24.8 (2016/17)
  - Revenue: 16.0 (2012/13), 16.4 (2013/14), 17.6 (2014/15), 18.9 (2015/16), 19.4 (2016/17)
  - Tax revenue: 14.2 (2012/13), 15.1 (2013/14), 16.2 (2014/15), 17.7 (2015/16), 18.2 (2016/17)
  - Grants: 7.9 (2012/13), 8.8 (2013/14), 8.7 (2014/15), 6.5 (2015/16), 5.4 (2016/17)
  - Total expenditure and net lending: 29.0 (2012/13), 30.0 (2013/14), 29.6 (2014/15), 27.9 (2015/16), 27.1 (2016/17)
  - Overall deficit (cash basis): -5.3 (2012/13), -5.1 (2013/14), -4.5 (2014/15), -2.6 (2015/16), -2.5 (2016/17)

### Monitoring framework, TMU, and program conditionality
- Performance monitored by quantitative assessment criteria and indicative targets; parsimonious set of structural benchmarks focusing on revenue mobilization, PFM reforms, monetary and exchange rate flexibility, financial sector development, and statistics.
- Key dates:
  - First test date: December 31, 2013.
  - First review mission: spring 2014.
- TMU period: December 2, 2013–November 30, 2016.
- Quantitative assessment criteria include floors/ceilings on NFA of NBR, reserve money, net domestic financing, contracting of new non-concessional external debt (continuous), and external payment arrears (continuous).
- Indicative targets include domestic revenue collection, net accumulation of domestic arrears, consolidated domestic debt, and priority spending.
- Selected program numeric targets and operational figures:
  - Net foreign assets of the NBR (US$ or RF equivalents): June 2013 actual 542.7; Dec. 2013 prog 511.7; June 2014 prog 459.0.
  - Reserve money (upper bound): June 2013 actual 203.9; Dec. 2013 prog 218.0; June 2014 prog 231.1.
  - New nonconcessional external debt contracted or guaranteed by public sector (US$ millions): June 2013 actual 655.0; Dec. 2013 actual 705.7 (Not Met); Dec. 2013 prog 0.0; June 2014 prog 0.0.
  - Domestic revenue collection (floor on flow): June 2013 actual 361.5; Dec. 2013 actual 390.3; Dec. 2013 prog 787.1; June 2014 prog 466.4.
  - Euro bond: 400.0 (US$ millions); unused euro bond proceeds memorandum items: 180.0, 219.0, 39.0, 121.2.
  - Memorandum: Budget support grants (US$ millions): June 2013 actual 246.8; Dec. 2013 actual 185.1; Dec. 2013 prog 473.6; June 2014 prog 100.2.
- Reporting requirements:
  - Weekly transmission of NBR foreign assets/liabilities within seven days; monthly data within five weeks; authorities to inform IMF staff at least ten business days prior to material policy changes.
  - Monthly transmission of data on repayment of domestic arrears and domestic debt within five weeks.

### Financial sector measures and operational milestones
- Measures to contain NPLs:
  - Close monitoring and enforcement of bank recovery strategies; write-offs; strengthen risk management; capacity building; regular onsite inspections.
- FSDP 2 priorities:
  - Target: above 80 percent of population access to finance.
  - UMURENGE SACCO consolidation into national cooperative bank by end-December 2015.
  - Check capping to be introduced by January 2014.
  - Publish quarterly inflation reports by End-March 2014.
  - Issue Treasury bills with maturities of six months and longer by End-Dec 2013.
  - Design deposit guarantee scheme by End-June 2014.
- Bank Supervision Department staffing: 17 staff; six more inspectors to be recruited.

### Staff recommendation and program approval
- Staff recommends completion of the seventh and final review under the expiring PSI and approval of a new three-year PSI.
- Staff supports waiver for the non-observance of continuous QAC on contracting of non-concessional borrowing (Rwandair US$50.7 million), conditional on authorities’ commitments that public entities will seek Ministry approval before contracting external loans and adhere to consultation clauses.
- Authorities requested cancellation of existing PSI and immediate effectiveness of the new PSI.

### Conclusion and policy implications
- Rwanda’s recent macro performance described as laudable; prudent macro policies, good governance, and effective use of aid underpinned rapid growth and poverty reduction.
- Key medium-term policy focus:
  - Accelerate domestic resource mobilization and improve expenditure prioritization.
  - Modernize monetary framework and enhance exchange rate flexibility.
  - Deepen financial markets and expand access to credit.
  - Preserve external stability and maintain prudent debt management.
- Main vulnerabilities: small and narrow export base and heavy reliance on external aid; need to rebuild policy buffers and ensure reserves sufficiently large to respond to shocks.
- Authorities and staff agree on program priorities and conditionality to support sustained, inclusive growth.

*Source: Excerpt from IMF staff report and associated boxes, appendices, and tables in _cr13372.*

### 1. Experiences and Lessons from the Expiring PSI __________________________________________________5

### 1. Experiences and Lessons from the Expiring PSI

### The context and objectives
- Rwanda achieved average annual economic growth in excess of 8 percent over the last decade, with low inflation and modest public debt, supported by significant inflows of foreign aid and strong emphasis on institutional capacity, good governance, and a business-friendly environment.
- The authorities’ EDPRS 2 priorities: (i) economic transformation to sustain rapid growth; (ii) rural development; (iii) productivity and youth employment; and (iv) accountable governance, supported by macroeconomic stability and improved public financial management. Regional integration through the EAC is emphasized.
- Authorities requested a successor PSI to maintain the close policy dialogue and signal the strength of economic policies to donors and investors in the absence of a present or prospective balance of payments need.

### Key lessons from the expiring PSI (Box 1)
- Implementation of macroeconomic policies was generally strong; the policy response to the global economic crisis and the aid shock during FY2012/13 was appropriate.
- Prioritizing reforms is important; significant progress was made on public financial management, particularly strengthening transparency and budget execution reporting.
- Fiscal efforts on revenue mobilization were hampered by low compliance and a narrow tax base.
- Pace of reforms must be calibrated to implementation capacity; monetary framework improvements and greater exchange rate flexibility benefit from capacity building at the National Bank of Rwanda; financial sector efforts focus on enhancing access to financial services and building supervisory capacity.

### Recent economic developments (A. Economic Developments)
- Growth and inflation:
  - Real GDP growth slowed and eased to 5.9 percent year-on-year in the first half of 2013.
  - Twelve-month headline inflation was 5.1 percent in September; core inflation (excluding fresh foods and fuels) was 3.3 percent.
- Balance of payments and reserves:
  - Export volumes for major mineral exports rose; seven new mines started up in 2013.
  - Foreign exchange reserves stabilized at about 3.5 months of prospective imports.
- Fiscal outturn for FY2012/13 (Text Table 1; percent of GDP):
  - Revenue and grants: 24.6 23.9 -0.7
  - Revenue: 15.1 16.0 0.9
  - Grants: 9.4 7.9 -1.5
  - Total expenditure and net lending: 30.5 29.0 -1.5
  - Current expenditure: 13.6 13.8 0.2
  - Capital expenditure: 13.4 12.3 -1.1
  - Net lending: 3.5 3.0 -0.6
  - Change in arrears: -0.2 -0.2 0.0
  - Overall deficit (cash basis): -6.1 -5.3 0.8
- Monetary conditions:
  - Broad money growth decelerated to 17 percent (year-on-year) at end-August 2013.
  - Private sector credit growth slowed from 35 percent at end-2012 to about 13 percent at end-August 2013.
  - Rwandan franc depreciated about 4 percent through September 2013.
  - With resumption of budget support and moderate depreciation, pressures in the foreign exchange market eased.

### Program performance (B. Program Performance)
- Progress under the PSI was satisfactory: all quantitative assessment criteria (QACs) were met except the ceiling on non-concessional borrowing (NCB).
- All indicative targets and structural benchmarks (SBs) were met.
- Non-observance of the NCB ceiling occurred when Rwandair contracted a new US$50.7 million external loan in July; proceeds were used to repay government debt.
- Authorities committed to reinforcing procedures requiring public entities to obtain Ministry approval before contracting foreign loans and to adhere to consultation clauses. Staff recommended a waiver based on these commitments.

### Near-term outlook and risks (C. Near-Term Outlook and Risks)
- Growth projections:
  - Projected growth for 2013 revised down to 6.6 percent, assuming a pick-up in construction and services as government spending normalizes after aid resumption.
  - Growth for 2014 projected at 7.5 percent, supported by recovery in agriculture and pick-up in services.
- Inflation and reserves:
  - Headline inflation projected to rise to 6.5 percent by end-2013 and to decline gradually to 6 percent in 2014.
  - Current account deficit (including grants) estimate for 2013 revised down by about 1 percentage point of GDP; reserve cover projected at 3.8 months of prospective imports by end-2013.
- Main downside risks:
  - Lower-than-assumed donor inflows relative to GDP could arise from donor concerns about DRC or donor-country budgetary pressures, adversely affecting public investment and growth.
  - Continued global weakness could hamper export expansion and diversification.

### Policy discussions and medium-term macroeconomic framework
- Agreed policy priorities:
  - Maintain a sustainable fiscal position while creating fiscal space by enhancing domestic revenue mobilization and pursuing further PFM reforms.
  - Modernize the monetary policy framework to ensure low and stable inflation.
  - Enhance access to credit and deepen the financial sector while reducing vulnerabilities through stronger banking supervision.
  - Preserve external stability, including debt sustainability.
- Medium-term projections agreed with authorities:
  - Real GDP growth averaging 7.5 percent annually during the program period.
  - Annual headline inflation converging to the NBR’s medium-term target of 5 percent.
  - Foreign reserves rising gradually to 4.1 months of prospective imports by the end of the PSI.
- These projections assume a soft landing in aid flows: aid recovers in FY2013/14 from depressed levels in FY2012/13, then declines gradually relative to GDP and as a share of spending over the medium term, with increased uptake of concessional project loans.

### A soft landing on aid (Box 2) — key figures and assumptions
- Historical reliance: grants averaged more than 11 percent of GDP per annum and covered more than 40 percent of total spending during the first years of the current decade.
- FY2012/13–FY2015/16 financial assistance (percent of GDP):
  - FY12/13 FY13/14 FY14/15 FY15/16
  - Grants: 7.9 8.8 7.8 6.5
    - Budget support grants: 4.1 3.8 3.7 4.0
    - Capital grants: 3.8 5.0 4.1 2.5
  - Loans: 2.1 2.3 3.6 3.4
    - Budget support loans: 0.4 0.0 0.0 0.0
    - Project loans 1/: 1.8 2.3 3.6 3.4
  - Total financial assistance: 10.1 11.1 11.4 9.9
  - 1/ Excludes euro bond of US$400 million in April 2013.
- Authorities expect budget and capital grants to recover in FY2013/14 and then be broadly stable in nominal terms but declining relative to GDP; uptake of project loans is planned to increase so total financial assistance recovers nominally before declining toward end of PSI period.

### Private sector development and investment prioritization (Box 3; MEFP ¶23, ¶42)
- Private sector strategy focuses on: reducing costs of doing business; improving infrastructure (energy and EAC connectivity); increasing access to finance; supporting skills development; investment promotion for FDI; entrepreneurship; credit expansion via credit guarantee schemes and lowering costs of securing bank loans; capacity development; regulatory improvements; and facilitating market access by reducing trade barriers.
- Export promotion measures include:
  - Revising Mining Law to allow longer-term concessions and merging prospecting and exploration licenses; increase investment in mining and facilitate small mining production.
  - Increasing tea and coffee production through a large-scale tea expansion program, land consolidation, new tea factories, and improving coffee productivity.
  - Targeting export-oriented investment in horticulture, milling, and cement via PPPs.
  - Establishing integrated logistics via PPPs, building off-dock container depots, finalizing one-stop border posts, and tackling non-tariff barriers.
- Staff emphasized careful prioritization of investment projects: only high economic return infrastructure projects should proceed given resource constraints. Authorities agreed to undertake feasibility studies for major projects (regional oil pipeline, railway, new international airport), recognize bulk financing is yet to be secured, and will consider PPPs; implementation will likely extend beyond program period.

*RWANDA — INTERNATIONAL MONETARY FUND (excerpt).*

### Box 4. Rwanda and EAC Integration

### Box 4. Rwanda and EAC Integration

### EAC integration: opportunities and institutional architecture
- The EAC has a population of 140 million and a combined GDP of about $100 billion.
- The union was formed in 1999 to forge economic and financial integration amongst its member states with the aim of an eventual political federation.
- Growth opportunities from greater integration:
  - Trade (customs union; common market)
  - Regional infrastructure projects
  - Eventual monetary union

### Customs union
- Set up in 2005 with the aim of establishing a common external tariff (three bands of 0 percent, 10 percent, and 25 percent, depending on the type of good), and rules of origin and standards.
- Seeks to promote trade by gradually eliminating internal tariffs and non-tariff barriers, and harmonizing customs documentation.

### Common market
- Established in 2010 envisaging the free movement of goods, labor, services, and capital across border.
- Specific initiatives include:
  - Adoption of common travel documents, work permits, and fees for education and tourism
  - Harmonization of transport facilitating instruments
  - Elimination of restrictions on the free movement of capital
  - Promotion of investment in capital markets, eventually leading to an integrated financial system
- Preparations are advancing for the establishment of a single customs territory between Kenya, Rwanda, and Uganda to harmonize customs systems and allow taxes to be paid at the port of entry (Mombasa), thereby reducing transportation costs for trade.

### Regional infrastructure initiatives
- Kenya, Rwanda, and Uganda have agreed on several regional infrastructure initiatives; each country will coordinate specific projects:
  - Kenya: development of a network of oil pipelines and a regional power transmission line
  - Uganda: railway
  - Rwanda: customs union, single visa, and EAC e-identity card
- Feasibility studies for the railway and oil pipeline remain to be completed and financing is yet to be secured.
- A regional hydroelectric power project located on the border between Rwanda and Tanzania (supported by the World Bank) is slated to start in 2014 that would supply 80 megawatts of electricity to be equally shared by Burundi, Rwanda, and Tanzania.

### Monetary union
- Envisages a process of convergence in the coming decade and gradual build up of common monetary institutions, generally modeled on the experience of the euro area.

### Rwanda’s engagement, benefits, and constraints
- Rwanda is heavily engaged in the EAC integration process and sees potential significant benefits.
- Trading relations have been increasingly oriented toward EAC partners following the launch of the customs union in 2005 and the common market in 2010.
- Non-tariff barriers remain an obstacle and contribute to high cross-border trading costs.

### Fiscal framework and revenue mobilization (major figures)
- Authorities’ medium-term fiscal framework aims to increase revenue mobilization, adjust spending to available resources while protecting priority spending, and minimize domestic financing to leave scope for private sector credit growth.
- The agreed strategy aims to gradually increase the headline tax revenue-to-GDP ratio by about 3.5 percentage points in the course of the PSI; the net revenue mobilization effort is about 2.4 percentage points of GDP (headline figure includes collection of revenue by the Rwandan Revenue Authority for local governments and cessation of tax exemptions for projects which will entail commensurate increase in project spending).
- Key fiscal numbers (percent of GDP) from Text Table 2, Rwanda: Fiscal Framework, 2012/13–2016/17
  - Revenue and grants: 23.9 (2012/13), 25.2 (2013/14), 25.3 (2014/15), 25.4 (2015/16), 24.8 (2016/17)
  - Revenue: 16.0 (2012/13), 16.4 (2013/14), 17.6 (2014/15), 18.9 (2015/16), 19.4 (2016/17)
    - Tax revenue: 14.2 (2012/13), 15.1 (2013/14), 16.2 (2014/15), 17.7 (2015/16), 18.2 (2016/17)
    - Non-tax revenue: 1.8 (2012/13), 1.3 (2013/14), 1.3 (2014/15), 1.2 (2015/16), 1.2 (2016/17)
  - Grants: 7.9 (2012/13), 8.8 (2013/14), 8.7 (2014/15), 6.5 (2015/16), 5.4 (2016/17)
    - Of which: Budget support: 4.1 (2012/13), 3.8 (2013/14), 3.7 (2014/15), 4.0 (2015/16), 3.8 (2016/17)
  - Total expenditure and net lending: 29.0 (2012/13), 30.0 (2013/14), 29.6 (2014/15), 27.9 (2015/16), 27.1 (2016/17)
    - Current expenditure: 13.8 (2012/13), 14.0 (2013/14), 14.3 (2014/15), 14.4 (2015/16), 14.2 (2016/17)
    - Capital expenditure: 12.3 (2012/13), 13.7 (2013/14), 14.5 (2014/15), 12.7 (2015/16), 12.1 (2016/17)
  - Overall deficit (cash basis): -5.3 (2012/13), -5.1 (2013/14), -4.5 (2014/15), -2.6 (2015/16), -2.5 (2016/17)

### Revenue mobilization strategy (Box 5 highlights)
- Headline tax revenue-to-GDP ratio assumed to rise from 14.2 percent in FY2012/13 to 17.7 percent in FY2015/16 under the new PSI.
- About a third of the increase is broadly neutral as it will entail additional spending on transfers to local governments and capital projects.
- Revenue administration measures:
  - RRA to strengthen tax compliance, including full rollout of electronic billing machines and more comprehensive use of information technology.
- Tax policy measures (timing and content as presented):
  - Initial measures (to be included in the supplementary budget in December): raising the excise tax on mobile airtime and introducing a royalty tax on mining.
  - FY2014/15: emphasis on broadening the base for VAT through revision of exemption and zero-rating schedules; prepare a review of tax expenditures to be submitted jointly with the budget.
  - FY2015/16: introduce comprehensive tax regimes for agriculture and mining and improve property taxation; technical assistance requested from the Fund.
- Tax revenue composition and annual change (Rwanda: Tax Revenue in New PSI, percent of GDP)
  - Tax revenue: 14.2 (FY2012/13), 15.1 (FY2013/14), 16.2 (FY2014/15), 17.7 (FY2015/16)
    - Direct taxes: 6.1, 6.4, 6.8, 7.5
    - Taxes on goods and services: 6.8, 7.5, 8.3, 9.1
    - Taxes on international trade: 1.2, 1.1, 1.1, 1.1
  - Annual change (net of local government taxes and taxes on project spending) shown in the box table:
    - Tax revenue annual changes: 0.9 (FY2012/13), 1.1 (FY2013/14), 1.5 (FY2014/15)
    - Net annual tax revenue effort in new PSI around 1 (table note 1)

### Public financial management (PFM) and spending priorities
- Government adopted a comprehensive five-year PFM plan to ensure efficient, effective, and accountable use of public resources.
- Three priority areas for the next five years:
  - Strengthening controls by scaling up implementation of IFMIS
  - Strengthening PFM systems at the sub-national level
  - Enhancing training, professionalization, and capacity building across all PFM disciplines
- Spending side commitments:
  - Control current spending to leave room for capital projects
  - Capital expenditure expected to peak as a share of GDP in 2014/15 reflecting completion of strategic investment projects (including in the energy sector)
  - Spending targeted on social programs to support poverty reduction and employment generation through education and training
  - Transfers to the electricity supply company expected to gradually decline as new generation capacity comes online and generation cost converges toward electricity tariffs

### Monetary policy modernization and liquidity management
- Monetary policy aims at achieving a 5 percent inflation target over the medium term.
- Reserve money remains the anchor, with a shift to a quarterly average for reserve money (within a band) to inject greater flexibility.
- Authorities committed to preserving foreign reserves and allowing market developments to be reflected in the official exchange rate; staff encouraged fuller operation of the exchange rate corridor.
- Box 6 measures to strengthen the monetary policy framework and transmission mechanism:
  - Managing liquidity:
    - Issue treasury bills as a monetary policy instrument for absorbing longer-term and more permanent liquidity (in consultation with the Treasury)
    - Develop a bond issuance program
    - Provide instruments with longer maturities by extending the maturity period of repos
    - Develop a secondary market
  - Facilitating interbank transactions:
    - Activate transfer of collateral across banks and promote horizontal repos
    - Define an intervention mechanism to avoid daily surplus or deficit positions for banks
  - Improving modeling and forecasting capacity:
    - Develop and refine inflation forecasting and macroeconomic models
    - Expand staff trained to use these models
  - Building capacity:
    - Inform commercial banks about changes and operational implications
    - Continue support to the Treasurers’ Association through training
  - Furthering communication and transparency:
    - Publish a quarterly inflation report
  - Improving the foreign exchange market:
    - Allow the official exchange rate to move more flexibly within the corridor
    - Improve communication regarding foreign exchange transactions and articulate intervention procedures to market participants
- NBR will issue treasury bills as a monetary policy instrument to absorb longer-term liquidity, in consultation with the Treasury.

### Financial sector: access to credit and stability measures
- Banking system remains strong despite a recent increase in non-performing loans (NPLs); most solvency, liquidity, and profitability indicators are in line with or exceed prudential norms.
- NBR requested commercial banks with NPLs above 5 percent to submit recovery plans and set up dedicated units; improve collateral quality and credit underwriting.
- Regulatory and supervisory reforms underway:
  - Planned consolidation of SACCOs in 2015
  - New banking law introducing general provisioning for normal loans and covering mobile and agent banking
  - New deposit insurance law
  - Amendments to insurance law to incorporate micro-insurance sector
  - New law to liberalize private pensions
  - Program to promote training and retention of bank supervisors; integrate on-site and off-site supervision next fiscal year
  - Participation in supervisory colleges for joint on-site inspections of cross-border banks
  - Implementation of recommendations from the AML/CFT assessment encouraged
- Financial deepening challenges:
  - Credit as a ratio to GDP is the lowest in the EAC
  - FSDP 2 aims to tackle impediments to financial intermediation and increase saving and investment opportunities
  - NBR plans a bond issuance program and longer-term treasuries to support yield curve and secondary market development
  - Authorities expect three companies to list by the end of the fiscal year (two listed now) and are considering increasing cross-listing with the Nairobi Stock Exchange

### Debt sustainability
- Latest joint IMF-World Bank DSA shows Rwanda’s debt profile has improved significantly and the risk of debt distress is now judged to be “low”.
- CPIA classifies Rwanda as a strong performer, which raised assessment thresholds since the last DSA.
- Strong export performance in 2013 enlarged Rwanda’s export base and improved the debt sustainability outlook.
- Discount rate revised to 5 percent in line with a recent Board paper.
- All indicators used to assess debt sustainability remain below assessment thresholds under all scenarios examined; present value of external debt-to-exports remains below the threshold even in the event of an extreme shock.
- Conclusion: Rwanda has modest borrowing space and must continue prudent policies in project selection and financing.

### Technical assistance and program alignment
- New PSI will ensure TA provision remains aligned with authorities’ and program objectives; IMF involvement is expected, supported by AFRITAC East.
- Medium-term TA program centered on customs administration and PFM.
- Authorities requested additional TA to broaden the tax base, improve central bank capacity building, and develop financial markets.
- Collaboration ongoing to improve national accounts and develop high frequency economic indicators.

*Source: _cr13372 - Box 4. Rwanda and EAC Integration*

### 29.      Performance under the new three-year PSI will be monitored on the basis of

### Performance under the new three-year PSI will be monitored on the basis of

### Monitoring framework and timeline
- Performance will be monitored on the basis of quantitative assessment criteria and indicative targets similar to those for the expiring program (see Table 1 in MEFP).
- A parsimonious set of structural benchmarks (see Table 2 in MEFP) will focus on:
  - fostering revenue mobilization through both tax policy and revenue administration measures,
  - furthering PFM reforms,
  - ensuring greater monetary and exchange rate flexibility,
  - deepening financial sector development,
  - strengthening statistics.
- Key dates:
  - First test date: December 31, 2013.
  - First review mission: spring 2014.

### Staff appraisal — macroeconomic performance
- Recent performance:
  - Rwanda’s economic performance in recent years is described as laudable.
  - Prudent macroeconomic policies, good governance, and effective use of aid have underpinned rapid economic growth in a stable macroeconomic environment.
  - Substantial reduction in poverty and income inequality attributed to Rwanda’s inclusive poverty reduction strategy, including homegrown initiatives.
- Policy strategy:
  - The new poverty reduction strategy (EDPRS 2) aims for continued rapid and inclusive growth with an increasing role for the private sector and regional integration at the EAC level.
  - Emphasis on raising agricultural productivity, and improving education and training.
  - Expansion of social protection schemes to help ensure inclusive growth.
- Response to shocks:
  - Authorities responded to delays and cutbacks in budget support in FY2012/13 by trimming and delaying spending and drawing on reserve buffers to support economic activity.
  - Nonetheless, Rwanda remains vulnerable to shocks and needs to rebuild policy buffers.
  - Key challenges: expand and diversify the export base; ensure reserves are sufficiently large to allow a response to unforeseen external shocks.
  - Greater exchange rate flexibility is highlighted as crucial.

### Debt and program outlook
- Debt sustainability:
  - The new DSA classifies Rwanda at low risk of debt distress.
  - Favorable outlook underpinned by prospects for continued high growth and improved export outlook.
  - Recommendation: government should use its debt management strategy to continuously monitor debt sustainability prospects.
- PSI characterization:
  - The new PSI represents a continuation of the authorities’ prudent approach to economic policy.
  - Fiscal framework objectives:
    - increase revenue mobilization,
    - adjust spending to available resources while protecting priority spending,
    - minimize domestic financing to leave ample scope for private sector credit growth.
  - Monetary stance:
    - National Bank of Rwanda (NBR) remains committed to low inflation and financial sector stability and is building capacity to achieve these objectives.

### Revenue mobilization strategy
- Ambition and targets:
  - Over the next three years, the government intends to raise the tax revenue-to-GDP ratio by more than 2 percentage points of GDP in net terms.
- Measures to achieve target:
  - Continued revenue administration reform,
  - Broadening tax bases, particularly for VAT,
  - Introducing comprehensive tax regimes for agriculture and mining,
  - Strengthening the tax regime for property.
- Conditional needs:
  - The government’s growth and poverty reduction strategy depends on successful implementation of the revenue mobilization strategy.
  - Crucial that the strategy be supported by timely technical assistance.

### Monetary policy and financial sector recommendations
- Current framework and suggested reforms:
  - The monetary policy framework based on reserve money targeting has served Rwanda well but would benefit from more flexibility.
  - The monetary transmission mechanism needs to be made more effective through activation and development of new monetary policy instruments and financial markets.
  - A more effective transmission mechanism would allow lessening the role of the exchange rate in containing inflationary pressures and support exchange rate flexibility.
  - Greater transparency regarding the frequency and magnitude of NBR interventions would inject greater predictability in the market.
- Structural reform focus:
  - Public financial management: scale up information management systems to enhance transparency and accountability in use of public resources.
  - Financial sector: continue focus on developing financial markets and expanding financial access.

*Source: IMF staff appraisal and program summary as presented in the provided content unit.*

### 39.      Staff recommends the completion of the seventh and final review under the expiring

### _cr13372 - 39.      Staff recommends the completion of the seventh and final review under the expiring

### Staff recommendation and conditionality
- Staff recommends the completion of the seventh and final review under the expiring PSI and the approval of a new three-year PSI.
- Staff supports a waiver for the non-observance of the continuous QAC on the contracting of non-concessional borrowing.
- Authorities commit to ensure that all public entities seek approval from the Ministry of Finance and Economic Development before contracting any external loan, and to strictly adhere to the consultation clause in their Letter of Intent in the future.

### Recent macroeconomic performance (highlights)
- Real GDP growth: 6.2 (2009), 7.2 (2010), 8.2 (2011), 8.0 (2012), 7.5 (2013) (Table 1 series: "Real GDP growth6.27.28.28.07.56.6...")
- Consumer prices (period average): 10.3 (2009), 2.3 (2010), 5.7 (2011), 6.3 (2012), 5.7 (2013) (Table 1: "Consumer prices (period average)10.32.35.76.35.7...")
- Gross reserves (months of imports of goods and services): 5.4 (2009), 4.5 (2010), 5.1 (2011), 3.6 (2012), 3.8 (2013) (Table 1: "Gross reserves (months of imports of goods and services)5 5.44.55.13.63.8...")
- External current account balance (including official transfers, percent of GDP): -7.3 (2009), -5.4 (2010), -7.2 (2011), -11.4 (2012), -11.3 (2013) (Table 1: "Including official transfers-7.3-5.4-7.2-11.4-11.3...")
- External current account balance (excluding official transfers, percent of GDP): -17.2 (2009), -17.1 (2010), -19.0 (2011), -19.0 (2012), -19.5 (2013) (Table 1: "Excluding official transfers-17.2    -17.1-19.0-19.0-19.5...")

### Fiscal developments and projections
- Total revenue and grants (percent of GDP): 24.1 (2009), 25.6 (2010), 24.3 (2011), 25.7 (2012), 24.6 (2013) (Table 1: "Total revenue and grants24.125.624.325.724.6...")
- Revenue (percent of GDP): 14.9 (2009), 12.5 (2010), 13.7 (2011), 14.5 (2012), 15.1 (2013) (Table 1: "Revenue14.912.513.714.515.1...")
- Grants (percent of GDP): 9.3 (2009), 13.1 (2010), 10.7 (2011), 11.2 (2012), 9.5 (2013) (Table 1: "Grants9.313.110.711.29.5...")
- Total expenditure and net lending (percent of GDP): 26.3 (2009), 25.7 (2010), 27.7 (2011), 26.9 (2012), 30.5 (2013) (Table 1: "Total expenditure and net lending26.325.727.726.930.5...")
- Overall fiscal balance after grants (percent of GDP): -2.2 (2009), -0.1 (2010), -3.4 (2011), -1.2 (2012), -5.9 (2013) (Table 1: "After grants-2.2-0.1-3.4-1.2-5.9...")

### External sector and balance of payments (selected figures)
- Exports (f.o.b., US$ millions): 235.0 (2009), 322.4 (2010), 464.2 (2011), 590.8 (2012), 650.7 (2013) (Table 2: "Exports (f.o.b.),1 235.0322.4464.2590.8650.7...")
- Imports (f.o.b., US$ millions): 999.2 (2009), 1,084.0 (2010), 1,565.8 (2011), 1,967.0 (2012), 2,142.1 (2013) (Table 2: "Imports (f.o.b.)999.2  1,084.0   1,565.8   1,967.02,142.1...")
- Trade balance (US$ millions): -764.2 (2009), -761.5 (2010), -1,101.6 (2011), -1,376.2 (2012), -1,491.5 (2013) (Table 2: "Trade balance-764.2    -761.5  -1,101.6  -1,376.2-1,491.5...")
- Current account balance (incl. official transfers, US$ millions): -382.7 (2009), -305.0 (2010), -459.8 (2011), -812.8 (2012), -873.7 (2013) (Table 2: "Current account balance (incl. official transfers)-382.7    -305.0-459.8-812.8-873.7...")
- Gross official reserves (US$ millions): 742.2 (2009), 813.3 (2010), 1,050.0 (2011), 843.5 (2012), 925.5 (2013) (Table 2: "Gross official reserves 742.2   813.3  1050.0   843.5 925.5...")

### Monetary and financial sector developments
- Policy action: "In response to moderating inflationary pressures, the NBR cut the policy rate in June 2013."
- 91-day T-bill rate: Rwanda relative to peers shown in figures (Figure 6 caption: "91-day T-bill Rate").
- Broad money (M2) growth (Table 1 series): 13.1 (2009), 16.9 (2010), 26.8 (2011), 14.0 (2012), 15.5 (2013) (Table 1: "Broad money (M2) 13.116.926.814.015.5...")
- Reserve money (Table 1 series): 0.3 (2009), 12.5 (2010), 23.4 (2011), 17.2 (2012), 14.5 (2013) (Table 1: "Reserve money0.312.523.417.214.5...")
- Financial soundness indicators (Table 5 highlights, percent):
  - Regulatory capital to risk-weighted assets: 19.0 (2009), 21.6 (2010), 23.8 (2011), 21.4 (2012) (Table 5)
  - NPLs/gross Loans: 13.1 (2009), 11.3 (2010), 8.2 (2011), 6.7 (2012) (Table 5)
  - Return on average assets: 0.7 (2009), 1.9 (2010), 1.9 (2011), 2.2 (2012) (Table 5)

### Medium-term outlook and risks (selected projections)
- GDP growth: Projected to remain around "7.5" in the medium term (Table 1 projection series: "2014...2018 Real GDP growth...7.57.57.57.57.5").
- Inflation: Period average CPI projections show Rwanda below regional peers; period-average CPI projections charted for Rwanda, SSA, and EAC (Figure 7 captions: "Perio d Average CPI In flation Projections").
- External: Current account expected to improve as large investment projects come to completion; reserve coverage expected to remain adequate (Figure 7 captions).
- Fiscal: Fiscal position expected to improve due to enhanced revenue mobilization (Figure 7 captions).

*Source: Excerpt from IMF staff report (_cr13372) and accompanying figures and tables contained in the supplied content.*

### APPENDIX I. LETTER OF INTENT

### APPENDIX I. LETTER OF INTENT

### Program request and purpose
- Government requests IMF support under a new policy support instrument (PSI) to:
  - maintain macroeconomic stability,
  - sustain high rates of economic growth,
  - further reduce poverty and income inequality,
  - continue public financial management and financial sector reforms.
- Requests approval of quantitative targets for end-December 2013 and end-June 2014 and structural benchmarks as set out in the attached MEFP.
- Requests completion of the seventh review under the expiring PSI and a waiver for the non-observance of the quantitative assessment criterion (QAC) on non-concessional borrowing.
- Requests cancellation of the existing PSI arrangement and immediate effectiveness of the new PSI.

### Recent program performance (summary)
- Performance under the expiring PSI: all but one QAC for the seventh review were met; the continuous QAC on non-concessional borrowing was not observed when Rwandair availed itself of financing to lower its indebtedness to the Government by US$50.7 million.
- All quantitative indicative targets were met, as were the three structural benchmarks for the seventh review.

### Recent economic developments
- Growth and inflation:
  - Growth for the year revised downward to 6.6 percent.
  - Inflation subdued through September; expected to be around 6.5 percent at end-year.
- External sector:
  - Export of goods grew by 51.4 percent in value terms in the first half of the year.
  - Services receipts from tourism expected to increase by 11 percent in 2013.
  - Targeted reserve cover: 4 months of prospective imports of goods (3.8 months of goods and services) at end-2013 is within reach due in part to accumulation of unused proceeds from the euro bond.
- Fiscal developments (FY2012/13):
  - Domestic revenue collection exceeded original budget target by 1.5 percent of GDP.
  - Tax revenue exceeded original target by 0.2 percent of GDP.
  - Total grants disbursements were 3.8 percent of GDP short of target (two-thirds due to shortfall in budget support).
  - Current outlays were 1.0 percent of GDP below budget; capital outlays were 1.8 percent of GDP lower than budgeted.
  - Overall deficit (cash basis), excluding euro bond transactions, was 0.3 percent of GDP lower than budgeted.
  - Domestic finance was 2.3 percent of GDP lower than projected.
- Monetary and exchange rate developments:
  - NBR kept policy rate unchanged from mid-2012 until June 2013; lowered key policy rate by 50 basis points in mid-June.
  - Credit to private sector expanded by 7.6 percent between end-December 2012 and end-August 2013 (vs. 14.3 percent initially projected for the year).
  - Imports of capital goods declined by 21.3 percent in volume in the first eight months of 2013.
  - Spread between official and forex bureau rates peaked in early 2013 but narrowed since May 2013 following improved foreign aid inflows and issuance of debut Rwanda euro bond.

### Program performance details
- Through June 2013, all quantitative targets were met and progress made on structural benchmarks.
- July non-observance: QAC on non-concessional external borrowing due to Rwandair transaction (US$50.7 million).
- Three structural benchmarks for the seventh review implemented.

### Macroeconomic outlook and policies for 2013 and FY2013/14
- Growth and inflation outlook:
  - Growth revised downward by 0.9 percentage points to 6.6 percent for the year.
  - Growth expected to be driven by construction and recovery of services in second half of the year.
  - Inflation in September 2013 reached 5.1 percent and is projected at end-year to be around 6.5 percent.
  - Over the medium term, NBR aims for an annual average inflation of 5 percent.
- 2013/14 revised budget (highlights):
  - Total revenue and grants projected at 25.2 percent of GDP, 0.8 percent of GDP higher than original budget.
  - Domestic tax collections projected to rise to 15.1 percent of GDP (from 14.2 percent of GDP in FY2012/2013).
  - Inclusion of local government taxes yields 0.3 percent of GDP; on-going and new measures to yield 0.4 percent of GDP from January 2014.
  - Specific measures and expected yields in FY2013/14:
    - Removal of VAT exemptions on imports for investment certificate holders (no numeric yield specified).
    - Removal of employment discount expected to yield about RWF 1.1 billion, or 0.02 percent of GDP.
    - Increase of excise duties on airtime from 8 percent to 10 percent expected to yield about RWF 0.98 billion in FY2013/14 and RWF 1.97 billion or 0.04 percent of GDP a year thereafter.
    - Implementation of renegotiated DTA with Mauritius—tax rate of 10 percent for dividends and interest and 12 percent for management fees yielding about RWF 1.96 billion, or 0.04 percent of GDP, in FY2013/14.
    - Royalty tax on mining—two rates of 4 percent and 6 percent on basic metals and precious metals/stones respectively yielding RWF 1.67 billion or 0.03 percent of GDP in FY2013/14 and growing to RWF 3.35 billion, or 0.06 percent of GDP in FY2014/15.
  - Total expenditure and net lending at RWF 1584 billion is RWF 18.1 billion (0.3 percent of GDP) lower than original estimate of RWF 1602.1 billion.
  - Recurrent spending rises from RWF 710.4 billion (13.2 percent of GDP) to RWF 742.6 billion (14.1 percent of GDP) due to recruitment of essential public servants.
  - New expenditures of RWF 23.4 billion (0.4 percent of GDP) for export promotion activities.
  - Overall cash deficit projected at 5.1 percent of GDP (slightly lower than 5.5 percent of GDP in original budget).
- IFMIS implementation (PFM reforms):
  - IFMIS implemented in over 200 government entities (includes 60 central government entities, 31 districts & Kigali City, 18 embassies, 30 district pharmacies, 30 district mutuelle de santes, 14 sites for lower prosecution general offices, 15 sites for Rwanda Correctional Services and 14 sites for lower & intermediate courts).
  - Core functionalities implemented: budget preparation, accounts payable, accounts receivable, general ledger.
  - Government plans to extend IFMIS to remaining entities and to at least twenty independent projects by end-December 2014 (structural benchmark).
- Monetary and exchange rate policies:
  - NBR to maintain a prudent stance in Q4 2013 and in 2014.
  - Reserve money program targets adjusted; annual credit growth projected at 12.4 percent end-2013 and 13.7 percent end-2014.
  - Exchange rate to remain market driven; NBR to use exchange rate corridor system and aim to maintain spread between official and market exchange rates at normal transaction levels prevailing before mid-2012.
  - NBR aims to keep official reserves around a minimum level of 4 months of prospective imports of goods.

### Objectives and structure of the new three-year PSI
- Context:
  - EDPRS 2 (2013–18) launched to support Vision 2020 objectives and aims to reduce poverty from current level of 45 percent to below 30 percent (Latest EICV data are dated 2011).
- Four key pillars of the PSI:
  - Private sector development:
    - Continue investment in strategic infrastructure and deepen reforms to improve business environment.
  - Exports promotion:
    - Adopted export strategy to broaden export base, focus on limited products, diversify into non-traditional agro-based exports, extend production and add value in traditional exports.
  - Fiscal consolidation:
    - Create fiscal space through accelerated domestic resource mobilization and rationalization of spending to support investment needs and reduce dependence on external aid.
  - Financial sector development:
    - Deepen financial inclusion, implement FSDP2 including a financial literacy campaign emphasizing increased saving, strengthen capital markets to mobilize cheaper resources for private sector investment.

*Source: APPENDIX I. LETTER OF INTENT, November 12, 2013.*

### 16.      The medium-term macroeconomic framework incorporates the Government’s

### The medium-term macroeconomic framework incorporates the Government’s

### Medium-term growth outlook
- Real GDP growth is projected to average about 7.5 percent per year and represents the baseline assumption on the basis of existing resource estimates.
- Government will continue to look for and mobilize additional resources and when successful will revisit medium-term growth projections.

### Fiscal policy objectives and revenue projections
- Major objective: accelerate domestic resource mobilization and improve expenditure prioritization to reduce reliance on external donor financial assistance.
- Total revenue and grants projected to rise marginally from 25.2 percent of GDP in FY2013/2014 to 25.4 percent of GDP by FY2015/2016.
- Total grants projected to decline from about 8.8 percent of GDP in FY2013/2014 to 6.5 percent of GDP by FY2015/2016.
- Total tax revenue projected to rise from 15.1 percent of GDP in FY2013/2014 to 17.7 percent of GDP by FY2015/2016, showing a rise of 2.6 percent of GDP during this period.
- Net tax effort from tax measures expected to be 2.4 percent of GDP between FY2013/14 and FY2015/16.

### Expenditure, deficits, and debt strategy
- Total expenditure and net lending projected to decline from 30.1 percent of GDP in the revised budget of FY2013/2014 to 27.9 percent of GDP by FY2015/2016.
- Overall cash deficit projected to decline from 5.1 percent of GDP in FY2013/2014 to 2.6 percent of GDP by FY2015/2016.
- Fiscal stance aligned with Rwanda’s medium-term debt strategy (MTDS) to ensure debt maintained at a sustainable level over the medium term.

### External sector developments and reserves
- Public and private investment, including foreign direct investment and private investment in non-traditional commodities, expected to contribute to robust increases in export earnings in 2013–2016.
- Current account deficit projected to remain above 10 percent until 2015, before declining to 8.4 percent of GDP in 2016.
- Official reserves will be maintained at not less than 4 months of prospective imports of goods in the medium term.

### Monetary policy objectives and instruments
- Monetary policy will aim to ensure adequate liquidity to promote sustainable growth and achieve the headline inflation rate target of 5 percent over the medium term.
- Efforts to enhance flexibility of the monetary policy framework, particularly exchange rate management.
- Implementation of FSDP 2 will focus on developing financial markets and expanding access to financial services.
- Policy formulation will consider the East Africa Community (EAC) integration process.
- NBR intends to move towards using interest rates as the operational target by improving the monetary transmission mechanism, stimulating development of interbank and secondary markets for debt securities, reorganizing the primary market, broadening the investor base, ensuring a regular issuance calendar for ordinary and benchmark bonds, and transforming short-term monetary policy instruments into medium to long term maturities.
- NBR plans to begin producing inflation reports on quarterly basis in the first quarter of 2014.

### Macroeconomic vulnerabilities and risks
- Main vulnerabilities: small and narrow export base and heavy reliance on external aid.
- Uncertainty about aid inflows over the medium term, including incomplete funding cycles from multilateral donors.
- Risks from the global economic environment.

### Macroeconomic and structural reform priorities (EDPRS 2 alignment)
- Dual objective: achieve sustained economic growth to approach middle income country status while ensuring fast poverty reduction.
- Focus on reducing the cost of doing business through increased investment in infrastructure to ensure internal and external connectivity and removing remaining barriers to private sector investment.
- Establish regular public-private dialogue forums.
- Facilitate access to public goods for investors in priority export sectors and facilitate private sector financing (enhancing capital market functioning, encouraging lines of credit to SMEs, facilitating joint ventures).
- Sustain inclusive growth via increased agricultural productivity through scaled up investments in irrigation, reform of farming models, encouraging private extension services, and building rural infrastructure (rural roads, energy, post-harvest infrastructure).
- Emphasize skills development to translate growth into job creation.

### Financing strategic investments
- Government committed to implementing strategic projects: Bugesera International Airport, regional railway project, bulk petroleum storage facility, and an oil pipeline.
- Commitment to pursue all financing options but ensure they do not jeopardize debt sustainability and that costs and risks are adequately balanced.
- Cost-benefit analysis and feasibility studies are being conducted on all projects.

### Revenue mobilization and tax administration reforms
- Comprehensive tax reform strategy to increase domestic resource mobilization through strengthening tax administration and broadening the tax base.
- Medium-term tax reform plan identifies tax policies and administrative measures to improve compliance, reduce exemptions, strengthen risk management, and broaden the tax base.
- Revenue administration reforms include:
  - Expand usage of electronic billing machines, fully enforce and monitor their usage and conduct more sensitization workshops to taxpayers and general public.
  - Increase take-up rate for e-filing and payment for domestic taxes and pension and medical contributions through sensitization and training.
  - Introduce mobile phone technology for payment and filing of taxes.
  - Introduce a new system to facilitate e-payment of non-tax revenues collected by RRA.
  - Automate revenue reconciliation and accounting system for quick and accurate reporting of revenue collections.
  - Develop RRA data warehouse system.
  - Operate electronic cargo tracking system (ECTS) to ensure protection of cargo from source to destination.
  - Implement gold card scheme in customs.
  - Implement clearance of goods at the port of Mombasa under the Single Customs Territory arrangement between Kenya, Uganda and Rwanda.
  - Follow up construction of one-stop-border concept at Rusumo and Kagitumba border posts with 24 hour service to facilitate cross border trade.

### Specific fiscal measures starting FY2013/14
- Decentralized/local government taxes: business licence tax, property tax, and rental income tax had been devolved; RRA mandated to collect these taxes on behalf of decentralized entities to improve yields given completed land registration and land titles issuance. Local government taxes expected to yield a cumulative 1.6 percent of GDP between FY2013/14 and FY2015/16.
- Externally financed projects: exemption from domestic taxes lifted; externally financed projects expected to pay taxes and yield a cumulative 1.5 percent of GDP between FY2013/14 and FY2015/16.

### Additional medium-term tax measures
- Undertake a comprehensive review of the mining taxation regime and taxation of the agricultural sector, with IMF technical assistance.
- Review the VAT law to broaden the base and remove unnecessary exemptions and zero ratings to particular sectors.
- Ministry of Finance and Economic Planning will prepare tax expenditure covering tax revenue foregone (structural benchmark) as an annex of the Budget Framework Paper to be submitted to Cabinet and Parliament starting next year.

### Public Financial Management (PFM) reforms and subsidiary entities
- Continue PFM reforms to strengthen effectiveness, transparency, and accountability of public resource use; improving PFM in subsidiary entities is a cornerstone.
- Subsidiary entities defined to support service delivery (district hospitals, district pharmacies, health centers, mutuelle de santé, primary and secondary schools) receive funds from multiple sources and have complex disbursement arrangements.
- Field visits revealed a wide range of problems affecting accounting and financing reporting of subsidiary entities; MINECOFIN pursuing measures to address and improve reporting.
- Development and phased implementation of an Easy-to-Use Application for accounting and reporting for subsidiary entities over three successive financial years starting with a pilot in FY2013/14:
  - Phase 1: development and pilot implementation for selected subsidiary entities during FY2013/14.
  - Phase 2: initial rollout across districts; accounts of subsidiary entities using the system consolidated into district accounts and included in consolidated Government accounts.
  - Phase 3: rollout to remaining subsidiary entities (structural benchmark) and development of automatic interface between subsidiary entities’ accounting system and IFMIS to support automatic financial reporting for consolidated government accounts.

### Financial sector development and stability
- Following Cabinet approval of FSDP 2, NBR to seek financing for key projects and build in-house capacity for implementation.
- FSDP 2 top four prioritized programs: (i) action plan for financial inclusion, (ii) developing institutions, markets and supporting infrastructure, (iii) investments and savings to transform the economy, and (iv) protecting consumers and maintaining financial stability.
- Ongoing initiatives: credit information awareness campaign, customer service delivery improvements for financial institutions, and a booklet for frequently asked questions in the financial sector.
- Banking law drafted internally and reviewed by an external expert with IMF facilitation through AFRITAC East; draft expected to be discussed and approved by NBR’s Board in December 2013, leading to development of new regulations such as on general provisioning.
- Board-approved Deposit Insurance Law to be tracked for finalization and subsequent implementing regulations.
- Legal and regulatory reforms intended to cater for Basel II/III implementation, including Banking Law amendments and implementing regulations, completion of draft Deposit Insurance Law, amendment of Insurance Law and regulations, and completion of the legal and regulatory framework for pensions.

*Source: Excerpt from the IMF staff report chapter on Rwanda’s medium-term macroeconomic and structural policies (FY2013/14–FY2015/16).*

### 38.      Strategies have been put in place to contain the rising trend of non-performing loans

### 38.      Strategies have been put in place to contain the rising trend of non-performing loans

### Containing rising non-performing loans (NPLs)
- Context: NPLs have risen following a period of rapid credit expansion and a slowdown in economic activity caused by the disruption of aid inflows.
- Measures adopted:
  - Close monitoring and enforcement of strategies committed by banks to contain NPL.
  - Cleaning of books (writing off unrecoverable loans).
  - Strengthening banks’ risk management functions.
  - Capacity building for banks’ staff in charge of credit analysis and administration.
  - Conduct of regular onsite inspections.

### Expanding financial market access and deepening (FSDP 2 priorities)
- Financial inclusion objective: attain above 80 percent of the population having access to finance.
- Priority activities:
  - Consolidation and automation of savings and credit cooperatives (SACCOs).
  - Complete micro-insurance diagnostic study and infrastructure.
  - Consumer protection and financial literacy.
  - Develop framework for mobile money agent banking.
- Specific measures and timelines:
  - Consumer protection and financial literacy diagnostic review conducted and to be discussed with stakeholders in early November 2013 prior to finalization; thereafter an action plan will be developed.
  - UMURENGE SACCOs to be consolidated to form a cooperative bank at national level by end-December 2015.
  - Automation of SACCO operations to be undertaken during the consolidation.
  - NBR will require ATMs and POS machines to be interoperable and will put in place a policy guideline on interoperability.
  - Move high-value payments to the RTGS by introducing a value cap on checks and EFTs; NBR will introduce check capping by January 2014.
  - Annual data on cross-border remittance flows published in the balance of payments statistics; data will also be published on a more regular basis as part of payments system reporting.
  - NBR supportive of MNOs moving into the cross-border market, requiring operators to address operational and foreign exchange risk issues prior to authorization.
  - RSwitch and VISA are present in the Rwandan retail payment market; competition and market forces are now capable of guiding developments.

### Capacity building and supervision
- Bank Supervision Department staffing and training:
  - Current team: 17 staff.
  - Recruitment planned: six more inspectors will be recruited.
- Training and capacity-building modalities:
  - Continuous capacity building for bank examiners through in-house training, seminars, workshops abroad, online training (FSI Connect), and professional courses.
  - Core training curriculum to be further developed and delivered to NBR supervision staff and market players.
- Rationale: Building capacity and professionalism in banking, insurance, microfinance, pension and their service providers is a critical success factor to FSDP 2.

### East African Community (EAC) integration
- EAC countries are at the final step of adopting an East African Community Monetary Union Protocol.
  - The Protocol will set macroeconomic convergence criteria as a precondition for ascending the single currency area and establish a transition period to align economies and policies.
- Government intent: looking to implement the protocol as greater benefits from regional integration are being seen, particularly after entering the common market in 2009.

### Program monitoring, targets, and timelines
- Review schedule:
  - First review expected to be completed by end-June 2014.
  - Second review expected to be completed by end-December 2014.
- Selected program milestones and policy measures (with target dates):
  - Check capping to be introduced by January 2014.
  - NBR to gather high frequency data and undertake economic sentiment surveys by End-Dec 2013.
  - Issue Treasury bills with maturities of six months and longer as a monetary policy instrument to absorb longer-term liquidity by End-Dec 2013.
  - Start publishing money market rates (interbank, repo, and T-bill) for different maturities bi-weekly by End-Dec 2013.
  - Start publishing quarterly inflation reports by End-March 2014.
  - Design a deposit guarantee scheme by End-June 2014.
  - Prepare plan for strengthening monetary and exchange rate operations by End-March 2014 (based on MCM TA recommendations and NBR assessment).
  - Use Treasury bills (or other tradable securities) as underlying collateral in liquidity-absorbing repos by End-June 2014.
  - Complete determination of detailed system and technical requirements for the Integrated Financial Management Information System by End-September 2013 (status: Met).
  - MINECOFIN to publish quarterly reports of budget execution within 45 days of end of each quarter (Continuous, starting mid-May 2011) (status: Met).
  - MINECOFIN/RRA to prepare a medium term revenue mobilization plan by End-June 2013 (status: Met).

### Selected quantitative and operational figures cited
- Bank Supervision Department: 17 staff; six more inspectors to be recruited.
- UMURENGE SACCO consolidation target: end-December 2015.
- Check capping introduction: January 2014.
- Timetable for program reviews: first review by end-June 2014; second review by end-December 2014.
- Program exchange rates (2013, end-December 2012 rates apply for 2013):
  - Rwanda Franc (per US$) 631.41
  - Euro 1.3194
  - British Pound 1.6144
  - Japanese Yen (per US$) 83.5778
  - SDR 1.5386
- Table highlights (selected items as presented):
  - Net foreign assets of the NBR at program exchange rate (floor on stock): June 2013 actual 542.7; Dec. 2013 prog 511.7; June 2014 prog 459.0.
  - Reserve money (ceiling on stock) (upper bound): June 2013 actual 203.9; Dec. 2013 prog 218.0; June 2014 prog 231.1.
  - Reserve money (ceiling on stock) (lower bound): June 2013 actual 199.9; Dec. 2013 prog 213.7; June 2014 prog 226.5.
  - Net domestic financing (ceiling on flow): June 2013 actual -58.4; Dec. 2013 prog 22.2; June 2014 prog 86.7.
  - New nonconcessional external debt contracted or guaranteed by the public sector (US$ millions) (ceiling on stock): June 2013 actual 655.0; Dec. 2013 actual 705.7 (Not Met); Dec. 2013 prog 0.0; June 2014 prog 0.0.
  - Domestic revenue collection (floor on flow): June 2013 actual 361.5; Dec. 2013 actual 390.3; Dec. 2013 prog 787.1; June 2014 prog 466.4.
  - Net accumulation of domestic arrears (ceiling on flow): June 2013 actual -42.4; Dec. 2013 actual -43.5 (Met); Dec. 2013 prog -50.8; June 2014 prog -1.9.
  - Consolidated domestic debt of public sector (ceiling on stock, eop): June 2013 actual 313.8; Dec. 2013 actual 307.6 (Met); Dec. 2013 prog 337.3; June 2014 prog 337.6.
  - Total priority spending (floor on flow): June 2013 actual 280.9; Dec. 2013 actual 298.8 (Met); Dec. 2013 prog 587.1; June 2014 prog 357.1.
  - Euro bond (US$ millions): 400.0 (unused euro bond proceeds shown as 180.0, 219.0, 39.0, 121.2 in memorandum items).
  - Memorandum item: Budget support grants (US$ millions): June 2013 actual 246.8; Dec. 2013 actual 185.1; Dec. 2013 prog 473.6; June 2014 prog 100.2.

### Technical Memorandum of Understanding (TMU) — program definitions and reporting
- Program period covered by the TMU: December 2, 2013–November 30, 2016.
- Quantitative assessment criteria (AC) applied at test dates December 31, 2013 and June 30, 2014:
  - 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 (continuous).
  - Ceiling on stock of external payment arrears of the public sector (continuous).
- Indicative targets (IT) applied throughout program:
  - 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.
- Definitions and reporting requirements (selected):
  - NDF 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 includes consolidated credit to the government from NBR and commercial banks as recorded in the monetary survey; excludes Treasury bills issued by the NBR for monetary policy purposes whose proceeds are sterilized.
  - Non-bank holdings include treasury bills, bonds (domestic and non-resident), old development bonds (pre-1994 debt), new development bonds (including those used for recapitalization of banks), and other accounts receivable.
  - Adjusters to NDF include: upward adjustment for shortfalls in budgetary loans and grants up to US$80 million; downward adjustment for unused proceeds of the US$400 million euro bond in excess of US$121.2 million by end-December 2013; upward adjustment for expenditure for food imports in a food emergency.
  - Reporting frequency: monthly transmission of detailed data on NDF, domestic revenues, and priority expenditure within five weeks from the end of each month.
  - Net accumulation of domestic arrears definition: 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 since the beginning of the year (including repayment of float during the review year and repayment of older arrears).

*Source: _cr13372 - 38.      Strategies have been put in place to contain the rising trend of non-performing loans*

### 21. Reporting requirement. Data on repayment of domestic arrears and the remaining

### 21. Reporting requirement. Data on repayment of domestic arrears and the remaining

### Reporting requirements for arrears and domestic debt
- Data on repayment of domestic arrears and the remaining previous year’s stock of arrears will be transmitted on a monthly basis within five weeks of the end of each month.
- 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.

### Limits on external debt — ceiling on new non-concessional external debt of the public sector (AC)
- A ceiling applies to the contracting and guaranteeing by the public sector of new non-concessional borrowing with non-residents; this ceiling is given in Table 1. Quantitative Assessment Criteria and Indicative Targets of the MEFP which applies continuously from December 2, 2013 to October 31, 2016.
- The ceiling excludes non-concessional borrowing by one state-owned bank, the Bank of Kigali, which is assumed not to seek or be granted a government guarantee.
- The ceiling also applies to private debt for which official guarantees have been extended, including future swaps involving foreign currency loans guaranteed by the public sector, and which constitute a contingent liability of the public sector.

### Definition of the public sector
- The public sector comprises the general government (the central government, the NBR, local governments which include provinces and districts) and entities in which the government holds a controlling stake (owning more than 50 percent of the shares or the ability to determine general corporate policy).
- This definition of public sector excludes the Bank of Kigali.
- Government control of an entity can be established based on the following criteria:
  - (i) ownership of the majority of the voting interest;
  - (ii) control of the board or other governing body;
  - (iii) control of the appointment and removal of key personnel;
  - (iv) control of key committees of the entity;
  - (v) golden shares and options;
  - (vi) regulation and control;
  - (vii) control by a dominant public sector customer or group of public sector customers; and
  - (viii) control attached to borrowing from the government.

### Guarantees and concessionality
- For program purposes, the guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor.
- For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows:
  - the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
  - The discount rates used for this purpose is 5 percent.
  - The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees.

### Definition of debt (per Point 9 of the Guidelines on Performance Criteria with Respect to External Debt)
- Debt is a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
- Primary forms of debt include:
  - (i) loans, including deposits, bonds, debentures, commercial loans and buyers' credits, and temporary exchanges of assets equivalent to fully collateralized loans (e.g., repurchase agreements and official swap arrangements);
  - (ii) suppliers' credits, where the supplier permits the obligor to defer payments until after delivery of goods or services;
  - (iii) leases, where debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding payments that cover operation, repair, or maintenance.
- Under this definition, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are included as debt.

### Limit on stock of external payment arrears (AC)
- A continuous assessment criterion applies to the 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) 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 (IT) and adjusters
- For program purposes, domestic debt (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 either implicitly or explicitly.
- The authorities would 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 DD will be adjusted downward 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$121.2 million by end-December 2013.
  - The ceiling on the DD will be adjusted upward by the amount of expenditure for food imports in the case of a food emergency.

### Targets for monetary aggregates — Net foreign assets (NFA) of the NBR (AC)
- A floor applies to the net foreign assets (NFA) of the NBR for December 31, 2013 and for June 30, 2014.
- 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.
  - 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 for the NFA floor:
  - 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 Rwanda 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$121.2 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.
  - This 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 (AC)
- A ceiling applies to the stock of reserve money for December 31, 2013 and June 30, 2014 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 requirements and procedures
- 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.
- The authorities will inform 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 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.
- Submission instructions: 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).

### TMU Table 1 — reporting frequency highlights (selected items)
- Exchange Rates: Daily (D) — Frequency of reporting: D; Frequency of publication: D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Weekly (W) reporting; Monthly (M) publication.
- Reserve/Base Money: Weekly (W) reporting; Monthly (M) publication.
- Broad Money: Monthly (M) reporting and publication.
- Central Bank Balance Sheet: Weekly (W) reporting; Monthly (M) publication.
- Consolidated Balance Sheet of the Banking System: Monthly (M) reporting and publication.
- Volume of transactions in the interbank money market and foreign exchange markets and sales of foreign currencies by NBR to commercial banks: Daily (D) reporting; Weekly (W) publication.
- Consumer Price Index: Monthly (M) reporting and publication.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Monthly (M) reporting and publication.
- Comprehensive list of domestic arrears of the government: Monthly (M) reporting and publication.
- Stocks of public sector and public-Guaranteed Debt as compiled by MINECOFIN and NBR: Annual (A) reporting and publication.
- Notes on periodicity legend: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I).

### Debt sustainability assessment summary (excerpt)
- The estimated external debt of the public sector is expected to remain low at about 21 percent of GDP by end-2013 and primarily consists of concessional borrowing, while domestic debt has declined to be about 8 percent.
- Rwanda issued a US$400 million Eurobond in April 2013; proceeds have been used to pay down more expensive debt and to complete large investment projects.
- Rwanda’s export performance in 2013 improved significantly on the back of new investments in the mining sector.
- The Country Policy and Institutional Assessment (CPIA) has classified Rwanda as a strong performer, leading to higher thresholds for assessing debt sustainability.
- Rwanda’s external debt is assessed to remain below the indicative thresholds under all scenarios examined.
- Rwanda’s risk of debt distress is judged to have improved from “moderate risk” to “low risk”.

*Source: _cr13372 - 21. Reporting requirement. Data on repayment of domestic arrears and the remaining*

### 40.      Rwanda has enjoyed buoyant growth in recent years, contributing to impressive gains

### _cr13372 - 40.      Rwanda has enjoyed buoyant growth in recent years, contributing to impressive gains

### Growth, poverty reduction, and social indicators
- Growth has averaged 8.2 percent per annum since 2008, driven by strong public and private investment.
- Proportion of population below the national poverty line fell from 57 percent in 2006 to 45 percent in 2011.
- Access to schooling and healthcare facilities have improved significantly.

### Macroeconomic stability and inflation
- Inflation averaged 6 percent for the 5-year period from 2009.
- Inflation developments and the nominal RWF-USD exchange rate are highlighted in Figure 1 (percent change).

### Economic reform agenda and business climate
- EDPRS 1 focused on improving the business environment while ensuring broad sharing of growth gains.
- Emphasis on infrastructure investment and regulatory streamlining.
- Rwanda ranks as the second best country to do business in sub-Saharan Africa (behind Mauritius) and 32nd best performer globally according to the World Bank’s latest Doing Business survey.

### Donor support, borrowing, and public debt composition
- Donors (multilateral and bilateral) provided significant financial assistance, largely in the form of grants (general budget support, sectoral budget support, project grants).
- Rwanda tapped concessional borrowing mainly from multilateral donors and has used non-concessional borrowing for infrastructure in tourism, transportation, and energy.
- Table 1 / Table 2 highlights (end-2012 composition; fiscal 2009–13):
  - Total (external + domestic) public debt: 1,763 Millions US$; 100 Percent of total; 25.5 Percent of GDP.
  - External debt: 1,178 Millions US$; 67 Percent of total; 17.1 Percent of GDP.
  - Central government external: 1,027 Millions US$; 58 Percent of total; 14.9 Percent of GDP.
  - Multilateral: 873 Millions US$; 50 Percent of total; 12.6 Percent of GDP.
  - IMF: 13 Millions US$; 1 Percent of total; 0.2 Percent of GDP.
  - IDA: 430 Millions US$; 24 Percent of total; 6.2 Percent of GDP.
  - AfDB: 229 Millions US$; 13 Percent of total; 3.3 Percent of GDP.
  - Other multilateral: 201 Millions US$; 11 Percent of total; 2.9 Percent of GDP.
  - Official bilateral: 154 Millions US$; 9 Percent of total; 2.2 Percent of GDP.
  - Paris Club: 17 Millions US$; 1 Percent of total; 0.2 Percent of GDP.
  - Non-Paris Club: 137 Millions US$; 8 Percent of total; 2.0 Percent of GDP.
  - Guaranteed by the central government: 151 Millions US$; 9 Percent of total; 2.2 Percent of GDP.
  - Domestic debt: 585 Millions US$; 33 Percent of total; 8.5 Percent of GDP.
  - Billion RF: 369; 33 Percent of total; 8.5 Percent of GDP.
  - Short-term government and central bank: 0; 0.0 Percent.

- Fiscal developments (selected, percent of nominal GDP, 2009–2013):
  - Primary fiscal balance (including grants): -0.5 (2009), 0.0 (2010), -0.5 (2011), -2.7 (2012), -4.4 (2013).
  - Primary fiscal balance (excluding grants): -12.1 (2009), -13.5 (2010), -11.4 (2011), -12.1 (2012), -12.8 (2013).
  - Grants: 11.6 (2009), 13.5 (2010), 10.9 (2011), 9.4 (2012), 8.4 (2013).
  - Domestic revenue: 12.7 (2009), 13.1 (2010), 13.9 (2011), 15.2 (2012), 16.2 (2013).
  - Tax revenue: 12.2 (2009), 12.6 (2010), 13.2 (2011), 13.9 (2012), 14.7 (2013).
  - Primary expenditure: 24.9 (2009), 26.6 (2010), 25.3 (2011), 27.3 (2012), 29.0 (2013).
  - Public sector debt: 26.0 (2009), 27.5 (2010), 33.5 (2011), 25.5 (2012), 28.7 (2013).
  - Domestic: 11.6 (2009), 13.0 (2010), 15.6 (2011), 8.5 (2012), 8.0 (2013).
  - External: 14.4 (2009), 14.5 (2010), 18.0 (2011), 17.1 (2012), 20.8 (2013).

### 2012 aid shock and subsequent developments
- Resumption of hostilities in Eastern DR Congo in 2012 and Rwanda’s alleged role caused some donors to pull back support.
- Resulted in an aid shock of around 3 percent of GDP in 2012 and increased uncertainty.
- Donors generally resumed bilateral and multilateral aid disbursements following a peace accord signed in February 2013.
- Main change in donor support: repurposing of general budget support to sectoral assistance and project support.
- Resumption of aid flows alleviated short-term uncertainty but medium-term uncertainties remain.

### DSA assumptions, macroeconomic framework, and medium-term projections
- Near-term staff expectations: higher near-term growth and exports, but high investment will sustain strong import demand.
- GDP growth is expected to recover after the 2012 aid shock to 7.5 percent over the medium term.
- Revised macroeconomic framework expects current account deficit to decline more gradually than earlier expected.
- Framework more conservative on aid flows, assuming a more rapid reduction in aid than earlier envisaged.
- EDPRS 2 target to achieve middle-income status by 2020: average annual real GDP growth of 11.5 percent between 2012 and 2020 (authorities’ target).
- IMF/World Bank advised more cautious macroeconomic assumptions; authorities agree.
- Budget framework paper for 2013/14-2015/16 and the PSI assume annual real GDP growth of 7–7.5 percent in the medium-term, consistent with the DSA.

### Baseline external DSA (comparison to previous DSA; selected figures from Table 3)
- Stock of PPG external debt (Millions of U.S. dollars):
  - Previous DSA: 1,443 (2013), 1,588 (2014), 1,756 (2015).
  - Current DSA: 1,779 (2013), 2,108 (2014), 2,388 (2015).
- Percent of GDP (PPG external debt stock):
  - Previous DSA: 19.1 (2013), 19.1 (2014), 19.3 (2015).
  - Current DSA: 20.8 (2013), 21.5 (2014), 23.2 (2015).
- PV of PPG external debt (Millions of U.S. dollars):
  - Previous DSA: 1,088 (2013), 1,223 (2014), 1,367 (2015).
  - Current DSA: 1,140 (2013), 1,275 (2014), 1,473 (2015).
- PV of PPG external debt to revenues (percent):
  - Previous DSA: 102.0 (2013), 101.5 (2014), 102.3 (2015).
  - Current DSA: 94.4 (2013), 90.6 (2014), 88.4 (2015).
- PV of PPG external debt to exports (percent):
  - Previous DSA: 114.8 (2013), 117.0 (2014), 121.0 (2015).
  - Current DSA: 91.5 (2013), 90.8 (2014), 101.5 (2015).
- PPG external debt service to revenues (percent):
  - Previous DSA: 11.6 (2013), 8.4 (2014), 7.4 (2015).
  - Current DSA: 16.7 (2013), 5.6 (2014), 5.1 (2015).
- Discount rate (percent): Previous DSA: 4.0 (2013–2015); Current DSA: 5.0 (2013–2015).

### Key DSA medium-term assumptions (Table 4 highlights and Box 1)
- Nominal GDP (RF billions) path (selected): 2,985 (2009), 3,280 (2010), 3,814 (2011), 4,363 (2012), 4,926 (2013), 5,618 (2014), 6,354 (2015), 7,267 (2016), 8,304 (2017), 9,353 (2018), 27,819 (2033), 50,971 (2033), 57,534 (2033). [Table lists series across years as shown.]
- Real GDP (percentage change): 6.2 (2009), 7.2 (2010), 8.2 (2011), 8.0 (2012), 6.6 (2013), 7.5 (2014), 7.5 (2015), and 7.5 (2016–2033).
- GDP deflator (percentage change): 9.1 (2009), 2.5 (2010), 7.4 (2011), 5.9 (2012), 5.9 (2013), 6.1 (2014), 5.2 (2015).
- Fiscal (central government) highlights:
  - External grants (incl. HIPC relief): 11.6 (2009), 13.5 (2010), 10.9 (2011), 9.4 (2012), 8.4 (2013), trending down to 1.8 (2033).
  - Revenue (excl. external grants): 12.7 (2009), 13.1 (2010), 13.9 (2011), 15.2 (2012), 16.2 (2013), rising to 22.2 (2033).
  - Primary expenditures: 24.9 (2009), 26.6 (2010), 25.3 (2011), 27.3 (2012), 29.0 (2013), remaining high around 25.0 (2033).
  - Primary balance, incl. external grants: -0.5 (2009), 0.0 (2010), -0.5 (2011), -2.7 (2012), -4.4 (2013), and modest deficits thereafter.
  - Primary balance, excl. external grants: -12.1 (2009), -13.5 (2010), -11.4 (2011), -12.1 (2012), -12.8 (2013), improving toward -3.0 (2033).
  - Net domestic financing: -0.7 (2009), -0.8 (2010), 0.3 (2011), -1.9 (2012), 0.3 (2013), and 1.0 (later years).
  - Interest rate (percent) on domestic borrowing: 8.0 (assumed annually).
  - New external borrowing (percent of GDP): 1.1 (2009), 3.3 (2010), 2.6 (2011), 1.8 (2012), 3.1 (2013), 4.0 (2014), 3.1 (2015), 1.9 (2016), 2.4 (2017), 1.8 (2018), 2.0 (2019), 1.2 (2020).
- Balance of payments:
  - Exports of goods and services (percent of GDP): 11.0 (2009), 11.3 (2010), 14.1 (2011), 14.3 (2012), 16.7 (2013), 17.0 (2014), 16.0 (2015), rising toward 19.1 (2033).
  - Imports of goods and services (percent of GDP): 29.0 (2009), 29.2 (2010), 34.4 (2011), 34.8 (2012), 36.5 (2013), 35.1 (2014), 31.5 (2015), remaining high and amounting to 29.3 percent of GDP in 2033.
  - Current account, incl. official transfers: -7.3 (2009), -5.4 (2010), -7.2 (2011), -11.4 (2012), -10.3 (2013), -10.9 (2014), -10.3 (2015), narrowing to -6.0 percent of GDP by 2033 (Box 1 notes narrowing to 6 percent of GDP by 2033; Table shows current account -6.1 in some later years).
  - Foreign Direct Investment (percent of GDP): 2.3 (2009), 0.8 (2010), 1.7 (2011), 2.2 (2012), 2.2 (2013), 3.3 (2014), 3.2 (2015), 4.1 (2016), 4.4 (2017), 4.7 (2018), 4.9 (2019–2033).
  - Gross official reserves (months of imports of G&S): 5.4 (2009), 4.5 (2010), 5.1 (2011), 3.6 (2012), 3.8 (2013), 3.7 (2014), 4.0 (2015), and target coverage of 4.5 months by 2023.

- Box 1: Macroeconomic framework key highlights:
  - Long-run growth projected at 7.5 percent.
  - Exports expected to rise from 14.3 percent of GDP in 2012 to 19.1 percent by 2033.
  - Imports expected to remain high, amounting to 29.3 percent of GDP in 2033.
  - Current account forecast to remain in deficit, narrowing to 6 percent of GDP by 2033 (2012: 11.4 percent).
  - Inflation expected to decline to the medium-term target of 5 percent (after rising to 6.5 percent at end-2013).
  - Reserve buffers expected to be rebuilt after 2014 with coverage of 4.5 months of prospective imports by 2023.
  - Domestic revenues (excluding grants) to rise from 15.2 percent of GDP in 2012 to 22.2 percent by 2033.
  - Primary expenditures forecast to remain high at 25 percent of GDP.
  - Grants (including HIPC relief) forecast to decline from 9.4 percent of GDP in 2012 to 1.8 percent by 2033.
  - Domestic borrowing to decline until 2016, with modest recourse from 2017 (1 percent of GDP), domestic debt rising to 15.6 percent of GDP by 2033.
  - New domestic borrowing nominal interest rate assumed at 8 percent (real rate 3 percent).

### Projects excluded from the baseline DSA and alternative scenarios
- Three EDPRS 2 projects not included in this DSA because they are at an early stage of planning and regional agreements are not final:
  - Bugusera International Airport.
  - Regional railway project.
  - Bulk petroleum storage facility and pipeline.
- The DSA includes an alternative scenario showing implications of higher non-concessional borrowing.

### Debt management strategy and external debt developments
- External public sector debt (including publicly-guaranteed) remained low at 17 percent of GDP at end-2012.
- Concessional borrowings constituted 85 percent of total debt at the end of 2012, primarily from multilateral development institutions.
- The PSI included limits on contracting new non-concessional external debt; limits were adjusted to provide flexibility.
- Rwanda issued a 10-year, US$400 million Eurobond in April 2013:
  - Priced to yield 6.875 percent.
  - Nine times oversubscribed.
  - Secondary market rate recently around 8.7 percent.
  - Proceeds used to retire government-guaranteed borrowings for Kigali Convention Center (KCC) and RwandAir, and to complete KCC and Nyaborongo hydro-power plant.
  - Net increase in debt limited since a large part of proceeds used to retire existing debt.
- Nyaborongo hydro-power plant will add 28MW to the existing 100 MW installed capacity, lowering average generation costs.
- External debt outstanding at end-2012: US$1.2 billion (17 percent of GDP).
- External debt composition at end-2012 (percent shares of external debt outstanding):
  - IMF 1%
  - IDA 36%
  - ADB 19%
  - Other Multilateral 17%
  - Paris Club 1%
  - Commercial 15%
  - Other non-Paris club 5%
  - ExIm India 4%
  - China 2%

### Assumptions on future financing terms and conditionalities
- From 2013–17, framework based only on disbursements of external debt already contracted by central government as of June 2013 (primarily concessional; modest non-concessional amounts).
- From 2018 onward, any external financing need of central government financed by new external debt.
- Concessional aid envelope assumed constant in real terms; remaining gaps filled by non-concessional borrowing as needed.
- Alternative scenarios examine additional use of non-concessional debt.
- Any new non-concessional debt assumed to have:
  - 10-year tenure.
  - Interest rate of 8 percent.
  - Grace period of 1 year.
- Key multilateral partners (IDA and AfDB) assumed to provide highly concessional terms:
  - 40 year tenure, 10-year grace period, 0.8 percent commitment fee.
- Modest recourse to domestic borrowing after 2017, domestic debt assumed to carry nominal interest rate of 8 percent (3 percent real).

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### 51.      The authorities have made progress on enhancing their debt management capacity.

### _cr13372 - 51.      The authorities have made progress on enhancing their debt management capacity.

### Progress in debt management capacity
- Authorities prepared and presented their own DSA in October 2012, a structural benchmark in the current PSI (IMF Country Report no. 13/77).
- The DSA has underpinned the formulation of their medium-term debt strategy.
- Improved coordination between the Ministry of Finance and the central bank, including regular reconciliation of debt data.
- Greater coordination between debt management and fiscal policy through the annual budget framework paper.
- Key area for improvement: ensure contracting of non-concessional debt by state-owned enterprises is integrated into the debt management framework and program conditionality.
- A failure to inform the Fund of one such case led to a breach of the non-concessional borrowing ceiling during the 7th Review period.

### Framework used for the Debt Sustainability Assessment (DSA)
- The DSA is based on the latest debt sustainability analysis template for low-income countries (LIC-DSA).
- Analysis examines debt performance over a 20-year period until 2033, starting from debt outstanding at end-2012, and all debt contracted on that date, except proceeds of the Eurobond issued in April 2013.
- The analysis incorporates the Board decision to unify discount rates for external debt analysis for low-income countries.
- The unified decision sets the discount rate used to compute the present value (PV) of external debt at 5 percent, up from 3 percent; this change lowers the PV of Rwanda’s external debt.
- Thresholds for assessing debt sustainability depend on institutional quality (3-year moving average of the World Bank’s CPIA index), categorizing countries as weak, medium, or strong with corresponding thresholds.

### Policy performance and thresholds (as applied)
- Rwanda’s average CPIA score for 2010-12: 3.83 → assessed as “strong”.
- Thresholds used (as presented in the source):
  - CPIA ≤ 3.25 (Weak): Present value of debt in percent of GDP = 30;Exports = 100;Revenue = 200;Debt service in percent of GDP = 15;Exports = 18;Revenue = 15 (table format preserved in source).
  - 3.25 < CPIA ≤ 3.75 (Medium): Present value of debt in percent of GDP = 40;Exports = 150;Revenue = 250;Debt service in percent of GDP = 20;Exports = 20;Revenue = 20.
  - CPIA > 3.75 (Strong): Present value of debt in percent of GDP = 50;Exports = 200;Revenue = 300;Debt service in percent of GDP = 25;Exports = 25;Revenue = 22.

### Results and assessment of external debt
- Under the baseline and alternative scenarios, Rwanda’s debt is sustainable over the assessment window (to 2033).
- All common DSA indicators do not breach thresholds in the baseline; unlike previous exercises, all indicators remain below thresholds even under an extreme shock.
- The previously concerning indicator PV of debt-to-exports no longer breaches the threshold under an extreme shock, primarily due to expansion of Rwanda’s export base in this DSA.
- 2013 data shows a significant expansion in mineral exports: seven new mines producing cassiterite (tin ore) and coltan began operations in 2013, financed in part by foreign direct investment.
- Further improvements in mining expected to be incremental; framework builds in gradual improvement in non-traditional exports (horticulture and tourism).

### Scenarios of additional non-concessional borrowing examined
- Modest recourse: US$250 million in 2014 (3 percent of 2014 GDP).
- Higher recourse: US$500 million in 2014 (6 percent of GDP).
- Phased program: US$1 billion spread equally over 2014-18.
- Result: None of the indicative thresholds were breached in any scenario examined, indicating some space to tap commercial credit without losing “low risk” rating; cautionary note that space is modest.

### Implications of improved debt distress rating
- “Low risk” rating makes additional concessional financing available.
- IDA credits: tenures up to 40 years, including a grace period of up to 10 years, provided at zero interest rates; IDA credit envelope larger than for countries that only receive grants.
- Bilateral donors indicate capacity to mobilize greater resources to support Rwanda with a low debt distress rating.
- Aid scenario: assuming conversion of grants to credit from IDA from 2014 with a somewhat larger envelope, debt remains sustainable in all examined scenarios.

### Sustainability of public sector debt
- Domestic public debt remains low due to avoidance of domestic arrears and improved revenue collection.
- Domestic public debt in 2013 is expected to decline to 8 percent of GDP, trend forecast to continue to 2016.
- DSA allows modest recourse to domestic financing after 2017 (1 percent of GDP annually); domestic debt forecast to rise gradually to 15.6 percent of GDP by 2033.
- Total public sector debt (domestic plus external) expected to be stable at 31.5 percent of GDP (2013: 28.7 percent).
- PV of public debt-to-GDP projected to rise to 26.9 percent in 2032 and stabilize (23.2 percent in 2013).
- PV of debt-to-revenue projected to increase from 94.6 percent in 2013 to 109.7 percent in 2033.
- Spike in DS-to-revenue in 2023: increase by 8.5 percentage points of revenue from the year before due to Eurobond principal payment; level remains 12.7 percent of revenue in 2023 and 7.3 percent by end of assessment period.
- Alternative scenarios: indicators remain stable except when primary balance is fixed at 2013 level.

### Risks and policy implications
- Overall assessment: Rwanda’s risk of debt distress has improved to warrant an upgrade; debt is low and sustainable under all scenarios; public debt primarily concessional.
- Main risks:
  - Narrow export base remains principal risk; improvements in 2013 presumed durable but if gains are not durable, long-term debt sustainability could be at risk.
  - High dependence on foreign aid; sharper-than-assumed aid corrections remain possible.
  - Low domestic revenue base limits capacity to substitute for aid shortfalls; framework assumes revenues converge to regional average.
- Policy recommendations and implications:
  - Continue exercising caution in non-concessional borrowing; modest increases acceptable but high levels would raise risks.
  - Prioritize and sequence projects; support project selection with strong, independent cost-benefit analyses to ensure benefits justify using limited debt space.
  - Continue to avail concessional financing where possible; prioritize new concessional sources opened by low-risk rating over commercial borrowing.
  - Combine credible feasibility studies with early engagement with donors to induce development partner support.
  - Maintain a prudent medium-term debt management strategy and careful choice of future projects and financing.

### Authorities’ stance
- Authorities broadly agree with the DSA results.
- They concur that the narrow export base is the main risk but expect ongoing mining and non-traditional export investments to make export-base expansion durable.
- Authorities agree on maintaining a prudent medium-term debt management strategy and careful project and financing choices to avoid jeopardizing debt sustainability.

*Source: IMF staff and Rwandan authorities as presented in the DSA chapter of the provided document.*

### Appendix Table 1a.: External Debt Sustaina

### Appendix Table 1a.: External Debt Sustainability Framework, Baseline Scenario, 2010–2033

### External debt baseline and projections
- External debt (nominal): 17.6 (2010), 21.5 (2011), 21.7 (2012), 25.4 (2013), 25.6 (2014), 26.7 (2015), 26.7 (2016), 25.4 (2017), 25.1 (2018), 22.1 (average 2013–2018), 18.3 (2019–2033 average)
- of which: public and publicly guaranteed (PPG): 14.5 (2010), 18.0 (2011), 17.1 (2012), 20.8 (2013), 21.5 (2014), 23.2 (2015), 23.7 (2016), 22.9 (2017), 22.9 (2018), 20.5 (2013–2018 average), 15.9 (2019–2033 average)
- Change in external debt: 2.0 (2010), 4.0 (2011), 0.2 (2012), 3.7 (2013), 0.2 (2014), 1.2 (2015), -0.1 (2016), -1.3 (2017), -0.3 (2018), -2.6 (2013–2018 average), -0.9 (2019–2033 average)

### Identified net debt-creating flows and current account components
- Identified net debt-creating flows: 3.6 (2010), 3.6 (2011), 6.9 (2012), 6.8 (2013), 5.8 (2014), 5.4 (2015), 2.4 (2016), 1.7 (2017), 1.1 (2018), 0.0 (2013–2018 average), -0.1 (2019–2033 average)
- Non-interest current account deficit: 5.1 (2010), 6.9 (2011), 11.0 (2012), 3.8 (2013), 4.3 (2014), 9.6 (2015), 10.1 (2016), 9.6 (2017), 7.7 (2018), 7.3 (2013–2018 average), 7.0 (2019–2033 average)
- Deficit in balance of goods and services: 17.9 (2010), 20.3 (2011), 20.6 (2012), 19.8 (2013), 18.1 (2014), 15.5 (2015), 13.7 (2016), 13.4 (2017), 12.9 (2018), 11.3 (2013–2018 average), 9.8 (2019–2033 average)
- Exports: 11.3 (2010), 14.1 (2011), 14.3 (2012), 16.7 (2013), 17.0 (2014), 16.0 (2015), 15.8 (2016), 16.0 (2017), 16.4 (2018), 17.7 (2013–2018 average), 19.2 (2019–2033 average)
- Imports: 29.2 (2010), 34.4 (2011), 34.8 (2012), 36.5 (2013), 35.1 (2014), 31.5 (2015), 29.6 (2016), 29.4 (2017), 29.3 (2018), 29.0 (2013–2018 average), 29.0 (2019–2033 average)
- Net current transfers (negative = inflow): -13.3 (2010), -13.9 (2011), -10.2 (2012), -12.4 (2013), 1.6 (2014), -10.8 (2015), -8.7 (2016), -6.6 (2017), -6.8 (2018), -6.8 (2013–2018 average), -6.4 (2019–2033 average), -5.7 (2023), -4.6 (2033) — of which: official: -11.6 (2010), -11.4 (2011), -7.6 (2012), -8.5 (2013), -6.5 (2014), -4.6 (2015), -4.9 (2016), -4.9 (2017), -4.6 (2018), -3.9 (2013–2018 average), -2.8 (2019–2033 average)
- Other current account flows (negative = net inflow): 0.4 (2010), 0.5 (2011), 0.6 (2012), 0.6 (2013), 0.7 (2014), 0.8 (2015), 0.8 (2016), 0.6 (2017), 0.5 (2018), 0.5 (2013–2018 average), 0.4 (2019–2033 average)
- Net FDI (negative = inflow): -0.8 (2010), -1.7 (2011), -2.2 (2012), -1.3 (2013), 0.9 (2014), -2.2 (2015), -3.3 (2016), -3.2 (2017), -4.1 (2018), -4.4 (2013–2018 average), -4.7 (2023), -4.9 (2033)

### Endogenous debt dynamics and residuals
- Endogenous debt dynamics: -0.7 (2010), -1.7 (2011), -1.8 (2012), -0.7 (2013), -1.0 (2014), -1.1 (2015), -1.2 (2016), -1.2 (2017), -1.2 (2018), -1.3 (2013–2018 average), -0.8 (2019–2033 average)
  - Contribution from nominal interest rate: 0.3 (2010), 0.4 (2011), 0.4 (2012), 0.7 (2013), 0.7 (2014), 0.7 (2015), 0.6 (2016), 0.6 (2017), 0.6 (2018), 0.4 (2013–2018 average), 0.6 (2019–2033 average)
  - Contribution from real GDP growth: -1.0 (2010), -1.3 (2011), -1.5 (2012), -1.3 (2013), -1.7 (2014), -1.7 (2015), -1.8 (2016), -1.8 (2017), -1.7 (2018), -1.7 (2013–2018 average), -1.3 (2019–2033 average)
  - Contribution from price and exchange rate changes: 0.0-0.7-0.7 (table entry formatting preserved)
- Residual (3–4): -1.6 0.4-6.7 -3.1-5.7-4.3-2.5-2.9-1.4 -2.6-0.8 (table entry formatting preserved)
- of which: exceptional financing: 0.0 for all listed years

### Present value (PV) and ratio indicators
- PV of external debt: 15.6 (2023), 19.9 (2033), 19.5, 19.7, 19.3, 18.2, 17.5, 14.2, 13.1 (selected series entries)
- PV of external debt in percent of exports: 109.4, 119.4, 114.8, 123.5, 121.6, 113.8, 106.3, 80.3, 68.5 (selected series entries)
- PV of PPG external debt: 10.9, 15.3, 15.4, 16.2, 16.3, 15.7, 15.3, 12.6, 10.7 (selected series entries)
- PV of PPG external debt in percent of exports: 76.7, 91.5, 90.8, 101.5, 102.9, 98.1, 93.2, 71.4, 55.7 (selected series entries)
- PV of PPG external debt in percent of government revenues: 72.2, 94.4, 90.6, 88.4, 84.7, 80.1, 76.3, 60.5, 48.2 (selected series entries)
- Debt service-to-exports ratio (in percent): 4.5 (2010), 5.9 (2011), 6.9 (2012), 19.1 (2013), 8.6 (2014), 9.2 (2015), 9.0 (2016), 9.0 (2017), 8.8 (2018), 20.4 (2013–2018 average), 16.0 (2019–2033 average)
- PPG debt service-to-exports ratio (in percent): 4.1, 3.6, 4.1, 16.2, 5.6, 5.9, 5.6, 5.6, 5.3, 15.9, 6.2
- PPG debt service-to-revenue ratio (in percent): 3.5, 3.7, 3.8, 16.7, 5.6, 5.1, 4.6, 4.5, 4.3, 13.5, 5.4
- Total gross financing need (Billions of U.S. dollars): 0.3 (2010), 0.4 (2011), 0.7 (2012), 0.8 (2013), 0.7 (2014), 0.8 (2015), 0.6 (2016), 0.5 (2017), 0.5 (2018), 1.1 (2013–2018 average), 2.7 (2019–2033 average)
- Non-interest current account deficit that stabilizes debt ratio: 3.1 (2010), 2.9 (2011), 10.8 (2012), 6.0 (2013), 10.0 (2014), 8.5 (2015), 7.8 (2016), 8.5 (2017), 7.3 (2018), 8.8 (2013–2018 average), 6.5 (2019–2033 average)

### Key macroeconomic assumptions (selected)
- Real GDP growth (in percent): 7.2 (2010), 8.2 (2011), 8.0 (2012), 7.7 (2013), 2.4 (2014), 6.6 (2015), 7.5 (2016–2018 and projections), 7.4 (2019–33 average), 7.5 (selected projection years)
- GDP deflator in US dollar terms (change in percent): -0.1 (2010), 4.4 (2011), 3.5 (2012), 7.4 (2013), 4.5 (2014), 0.8 (2015), 2.3 (2016), 2.1 (2017), 3.3 (2018), 3.2 (2013–2018 average), 1.7 (2019–2033 average), 2.2, 2.0, 2.0, 2.0 (series entries)
- Effective interest rate (percent): 2.2 (2010), 2.3 (2011), 2.3 (2012), 1.6 (2013), 1.2 (2014), 3.4 (2015), 3.2 (2016), 2.9 (2017), 2.7 (2018), 2.6 (2013–2018 average), 2.5 (2019–2033 average), 2.9, 1.8, 3.2, 2.1 (series entries)
- Growth of exports of G&S (US dollar terms, in percent): 9.9 (2010), 41.5 (2011), 13.2 (2012), 22.5 (2013), 24.0 (2014), 25.6 (2015), 12.0 (2016), 3.3 (2017), 9.9 (2018), 12.2 (2013–2018 average), 12.4 (2019–2033 average), 12.6, 11.2, 10.2, 10.8 (series entries)
- Growth of imports of G&S (US dollar terms, in percent): 7.8 (2010), 33.1 (2011), 13.3 (2012), 21.9 (2013), 12.7 (2014), 12.6 (2015), 5.7 (2016), -1.4 (2017), 4.2 (2018), 10.4 (2013–2018 average), 8.9 (2019–2033 average), 6.7, 9.6, 9.6, 9.6 (series entries)
- Grant element of new public sector borrowing (in percent): 1.5 (first listed projection year), 41.0, 40.1, 41.7, 38.8, 52.5, 35.9, 46.2, 25.2, 34.3 (series entries)
- Government revenues (excluding grants, in percent of GDP): 13.1 (2010), 13.9 (2011), 15.2 (2012), 16.2 (2013), 17.0 (2014), 18.4 (2015), 19.2 (2016), 19.6 (2017), 20.1 (2018), 20.9 (2013–2018 average), 22.2 (2023), 21.3 (2033)
- Aid flows (in Billions of US dollars): 0.9 (2010), 0.7 (2011), 1.1 (2012), 0.7 (2013), 0.8 (2014), 0.9 (2015), 0.8 (2016), 0.7 (2017), 0.8 (2018), 1.0 (2013–2018 average), 1.1 (2019–2033 average)
  - of which: Grants: 0.8, 0.7, 0.7, 0.6, 0.7, 0.7, 0.6, 0.6, 0.6, 0.8, 0.9 (series entries)
  - of which: Concessional loans: 0.1, 0.0, 0.4, 0.1, 0.2, 0.2, 0.2, 0.1, 0.2, 0.3, 0.2 (series entries)
- Grant-equivalent financing (in percent of GDP): 8.5, 9.6, 8.8, 7.3, 6.1, 6.0, 4.8, 2.1, 4.0 (series entries)
- Grant-equivalent financing (in percent of external financing): 50.8, 83.8, 78.5, 80.0, 83.8, 84.2, 82.5, 70.4, 74.3 (series entries)

### Memorandum items (selected)
- Nominal GDP (Billions of US dollars): 5.6 (2010), 6.4 (2011), 7.1 (2012), 7.6 (2013), 8.4 (2014), 9.2 (2015), 10.2 (2016), 11.3 (2017), 12.4 (2018), 19.7 (2013–2018 average), 49.4 (2019–2033 average)
- Nominal dollar GDP growth: 7.1, 13.0, 11.8, 7.4, 10.0, 9.8, 11.0, 10.9, 9.3, 9.8, 9.6, 9.6, 9.6 (series entries)
- PV of PPG external debt (in Billions of US dollars): 0.8 (2010), 1.1 (2011), 1.3 (2012), 1.5 (2013), 1.6 (2014), 1.8 (2015), 1.9 (2016), 2.4 (2017), 5.2 (2018)
- (PVt-PVt-1)/GDPt-1 (in percent): 5.4, 1.8, 2.4, 1.8, 1.1, 1.1, 2.3, -1.3, 0.3, 0.9 (series entries)
- Gross workers' remittances (Billions of US dollars): 0.1, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.2, 0.4 (2013–2018 average), 1.0 (2019–2033 average)
- PV of PPG external debt (in percent of GDP + remittances): 10.7, 14.9, 15.1, 15.9, 16.0, 15.4, 15.1, 12.4, 10.5 (series entries)
- PV of PPG external debt (in percent of exports + remittances): 65.4, 80.4, 80.5, 89.9, 91.6, 88.0, 83.8, 64.4, 50.4 (series entries)
- Debt service of PPG external debt (in percent of exports + remittances): 3.5, 14.2, 5.0, 5.2, 5.0, 5.0, 4.8, 14.4, 5.6 (selected series entries)

### Sensitivity analysis (high-level findings from Table 1b and Table 2b)
- Table 1b (PPG external debt indicators) baseline PV of debt-to-GDP ratio: 15 (2013), 15 (2014), 16 (2015), 16 (2016), 16 (2017), 15 (2018), 13 (2023), 11 (2033)
- Table 1b scenario A2 (less favorable loan terms) increases PV of debt-to-GDP to: 15 (2013), 17 (2014), 19 (2015), 19 (2016), 19 (2017), 20 (2018), 18 (2023), 19 (2033)
- Table 1b baseline PV of debt-to-exports ratio: 92 (2013), 91 (2014), 102 (2015), 103 (2016), 98 (2017), 93 (2018), 71 (2023), 56 (2033)
- Table 1b A2 (less favorable terms) raises PV debt-to-exports to: 92, 99, 116, 122, 119, 119, 103, 97 (selected years)
- Table 2a public sector debt (baseline): public sector debt 27.5 (2010), 33.5 (2011), 25.5 (2012), 28.7 (2013), 27.7 (2014), 27.0 (2015), 27.1 (2016), 27.0 (2017), 28.7 (2018), 31.7 (2013–2018 average), 31.5 (2019–2033 average)
- Table 2a gross financing need: 3.4 (2010), 4.8 (2011), 8.7 (2012), 9.8 (2013), 7.6 (2014), 5.8 (2015), 3.9 (2016), 3.9 (2017), 4.2 (2018), 8.9 (2013–2018 average), 9.6 (2019–2033 average)
- Table 2b PV of Debt-to-GDP Ratio (baseline): 23 (2013), 22 (2014), 20 (2015), 20 (2016), 20 (2017), 21 (2018), 24 (2023), 26 (2033)
- Table 2b scenario A2 (primary balance unchanged from 2013) projects PV of Debt-to-GDP rising to: 23 (2013), 22 (2014), 21 (2015), 23 (2016), 25 (2017), 27 (2018), 37 (2023), 52 (2033)
- Stress tests illustrate sensitivity to: lower real GDP growth, lower export growth, lower US dollar GDP deflator, lower net non-debt creating flows, and a one-time 30 percent nominal depreciation; the most extreme shocks raise PV and service ratios noticeably in 2023 across indicators.

*Sources: Rwandan authorities; and IMF staff estimates and projections.*

### 2020. The government’s efforts towards achieving these goals have been organized in the

### 2020. The government’s efforts towards achieving these goals have been organized in the framework of the successive Economic Development and Poverty Reduction Strategies (EDPRS) with Fund-supported programs serving as appropriate anchors. The move from ECF-backed arrangements to the current PSI arrangement has been instrumental in its signaling effect. The government thus successfully issued a debut Eurobond of US $ 400 million, which was highly oversubscribed, showing the country’s attractiveness to investors on the international bond market.

### Recent Developments and Performance Under the PSI
- Program performance has remained strong despite domestic constraints, delayed donor aid and a morose global environment.
- All end-June quantitative assessment criteria were comfortably met, except:
  - The ceiling on nonconcessional borrowing (NCB), which was missed for a loan contracted by Rwandair, a public airline company.
  - Authorities and staff agreed that better communication and enforcement of procedures on contracting foreign loans by public entities should help prevent future NCB breaches.
- All structural benchmarks and indicative targets were met.
- Macroeconomic framework and projections:
  - Growth projected at 6.6 percent in 2013 (revised down from 7.5 percent) and compared with 8.0 percent in 2012.
  - Growth projected at 7.5 percent in 2014 with drivers: construction and services, underpinned by higher public spending and credit to the private sector.
  - Inflation projected to stand at 6.5 percent at year-end (pushed upward by food price hikes from a poor harvest).
  - NBR’s inflation target of 5 percent in the medium term.
- External position described as benign and expected to be enhanced by government export diversification efforts.
- Overall assessment:
  - The PSI framework has aided building a broad-based economy and reducing poverty.
  - PSI strengthened authorities’ toolkit to address external shocks.
  - Government and staff agreed on a set of policies for the successor PSI and the medium term.

### Policies for the New PSI and the Medium Term
- Policy priorities revolve around four areas:
  - Maintaining a sustainable fiscal position.
  - Modernizing the monetary policy framework.
  - Enhancing access to credit and deepening the financial sector.
  - Preserving external stability, including debt-sustainability.
- Link to EDPRS 2 goals (five-year): 
  - (i) economic transformation to sustain rapid growth;
  - (ii) rural development;
  - (iii) increased productivity and youth employment;
  - (iv) accountable governance;
  - supported by continued emphasis on macroeconomic stability and improved public financial management.
- Ambitious targets stated by authorities:
  - Posting high and sustainable growth well above the 7.5 percent projected in the medium term under the baseline scenario.
  - Reducing poverty from 45 percent to below 30 percent by 207/18.
  - Achieving middle income status by 2020.

- Maintaining a sustainable fiscal position:
  - Increasing domestic revenue as a share of GDP is a key priority.
  - Comprehensive reform package aimed at broadening the tax base and strengthening tax administration.
  - Expected headline tax revenue-to-GDP ratio increase: about 3.5 percentage points in the course of the PSI.
  - Measures include:
    - Raising the excise tax on mobile airtime and introducing a royalty tax on mining (end-2013).
    - Broadening the base for VAT.
    - Introducing comprehensive tax regimes for agriculture and mining.
    - Improving property taxation (FY2015/16).
  - Expenditure policy: adjust spending to available resources with priority to capital outlays, including strategic investments.

- Modernizing the monetary policy framework and deepening the financial sector:
  - Reforms to enhance monetary policy conduct and achieve the 5 percent inflation target over the medium term.
  - Liquidity management improvements: issuance of treasury bills and development of a secondary market.
  - Facilitation of interbank transactions.
  - Strengthening the Monetary Policy Committee with improved modeling and forecasting capacity.
  - Actions to enhance access to credit and deepen the financial sector.
  - Banking sector: remains strong despite some temporary increase in NPLs due to the economic slowdown.
  - Adoption of the second Financial Sector Development Plan (FSDP 2) with aims to:
    - Increase financial inclusion, including through savings and credit cooperatives.
    - Develop institutions, markets and supporting infrastructure.
    - Boost investments and savings to transform the economy.
    - Protect consumers and maintain financial stability.

- Fostering structural transformation and export promotion:
  - Move away from agriculture towards manufacturing and services with sustained double-digit growth over the medium term targeted for these sectors.
  - Step up structural transformation and broaden the export base to manufactured goods and services.
  - Enhance infrastructure programs to reduce the cost of doing business.
  - Emphasis on regional projects to enhance trade and regional integration through the East African Community.
  - Increase FDI; Rwanda Development Board overhauling its strategy.
  - Completion of strategic investments such as the Kigali Convention Center to position the country as a high-end tourist destination and regional provider of services in the international events market.

- Preserving external stability, including debt sustainability:
  - Authorities seek greater flexibility in the IMF policy on debt limits to give low-income members more room given declining concessional financing.
  - Staff encouraged to consider the productivity of investment, contribution to future economic growth, and potential to generate additional foreign exchange.
  - Authorities committed to strengthen debt management practices and prioritize preserving debt sustainability while pursuing development.
  - Joint IMF-World Bank debt sustainability analysis shows a significant improvement in the debt profile and assesses the risk of debt distress as “low”.

### Conclusion
- Amid drying aid inflows and a weak global outlook, authorities posted strong performance under the PSI and maintained the country’s positive momentum.
- Growth remains strong within a stable macroeconomic framework and structural reforms are on track.
- Authorities continue to fine-tune the policy mix to achieve higher and sustained growth capable of significantly reducing poverty.
- Maintaining a close policy dialogue with the Fund viewed as instrumental to garner international financial community assistance.
- The new PSI identifies key policy areas to lay the ground for building a broad-based economy and achieving sustained and inclusive growth and poverty reduction.
- Authorities request Board support for concluding the seventh review under the PSI and for a three-year successor PSI and Cancellation of the current PSI.

*IMF staff report content as provided.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13372.pdf_