## _cr14185

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### The Context and Recent Developments
- FY12/13 reduction in budget support caused spillovers on the government’s investment program and the services sector.
- Weak agricultural growth in the second half of 2013 produced the weakest growth rate in a decade.
- Government used some foreign exchange reserves to cushion the FY12/13 aid shock.
- Outlook for foreign financing (In percent of GDP):
  - Grants: 7.9 (2012/13), 9.1 (2013/14), 9.5 (2014/15), 7.4 (2015/16)
  - Project loans: 7.7 (2012/13), 2.4 (2013/14), 2.1 (2014/15), 3.6 (2015/16)
  - Of which: sovereign bond 5.5
  - Total: 15.6 (2012/13), 11.5 (2013/14), 11.6 (2014/15), 11.0 (2015/16)
  - Excluding sovereign bond: 10.1 (2012/13), 11.5 (2013/14), 11.6 (2014/15), 11.0 (2015/16)
- Authorities prioritized projects, identified those requiring non-concessional financing, and requested an increase in borrowing room for FY2014/15.

### Growth, Inflation, and National Accounts Rebasing
- Real GDP growth:
  - 4.6 percent in 2013.
  - Staff projects growth in 2014 to reach 6 percent.
  - Medium-term growth target of 7.5 percent is described as achievable under supportive conditions.
- GDP rebasing:
  - National accounts rebased from 2006 to 2011 base prices.
  - Nominal GDP rose by 1 percent relative to earlier estimates.
  - Rebasing introduced: intermediate consumption matrix; informal cross-border trade estimates; new construction estimates; Seasonal Agricultural Survey (including season C); improved livestock output estimates.
  - Effects: very slight changes in growth rates prior to 2010, slower growth rates subsequently; agriculture accounts for around a third of total output; services averaged 46 percent of total output (2011 prices) between 2006 and 2012.
  - Quarterly GDP data based on updated prices to be released in June 2014.
- Inflation:
  - Year-on-year headline inflation: 3.6 percent in 2013.
  - Inflation in March 2014: 3.4 percent.
  - Inflation expected around the central bank’s target of 5 percent by year-end.
- Sectoral growth (2013, Appendix I):
  - Agriculture: 3 percent.
  - Services (45 percent of GDP): 4 percent.
  - Industry: 11 percent.
  - Mining: 41 percent.

### External Sector and Balance of Payments
- Current account improved considerably in 2013; Eurobond issuance helped raise import cover to above four months.
- Improvement driven by strong export growth mainly in mining and flat imports.
- Reserves:
  - Reserves stabilized at 4.8 months of imports (Appendix I).
  - Foreign reserves coverage projected around 4 months of imports in 2014 (Appendix I).
- External projections:
  - Current account deficit projected to widen from 7.2 percent of GDP in 2013 to 12.1 percent of GDP in 2014.
  - Financing of increased imports in 2014 primarily from unused Eurobond proceeds allocated to the Kigali Convention Center and the Nyaborongo hydro project.

### Fiscal Developments and Budget Framework
- Fiscal stance and performance:
  - Fiscal position switched to a surplus in the second half of 2013 due to lower wages and capital spending, and sharply lower net lending.
  - FY2013/14 supplementary budget: budget deficit estimate lowered by ½ percent of GDP to 4.5 percent of GDP.
  - FY2014/15 budget stance: expenditures kept at about 30 percent of GDP; net lending increased by 1 percent of GDP to finance completion of Kigali Convention Center and export promotion.
  - With revenue measures, budget deficit projected to fall to slightly below 3 percent of GDP in FY2014/15 (Appendix I projects decline to 3.1 percent of GDP).
- Revenue and tax ratios:
  - Rwanda’s tax ratio: 14.2 percent in 2012/13.
  - Authorities expect to reach milestone of 14.9 percent of GDP by end of fiscal year (compared to target of 15.1 percent).
  - Target revenue increases in 2014/15: 0.9 percent of GDP (0.2 percent from excise on mobile airtime and mining royalty; 0.5 percent from central collection of local authority taxes; VAT from electronic billing machines).
  - Tax momentum into 2015/16: projected yield about 0.4 percent of GDP from agriculture/property tax measures; combined net taxes could reach up to 1 percent of GDP in 2015/16.
  - Authorities’ goal: take tax revenue collections to over 17 percent of GDP over time (Appendix I).
- Key FY2014/15 budget figures (Appendix I):
  - Total expenditure and net lending estimated at RWF 1696.9 billion (29.5 percent of GDP).
  - FY2013/14 total expenditure: RWF 1593.2 billion (31.2 percent of GDP).
  - Recurrent expenditure estimate: RWF 814 billion (increase of RWF 38.8 billion).
  - Capital expenditure estimate: RWF 782.2 billion (RWF 58.5 billion higher).
  - Net domestic cash finance of the 2014/15 budget expected around RWF 69.6 billion (1.2 percent of GDP).
  - Budget support assumption for FY2014/15: around 9.5 percent of GDP.

### Non-concessional Borrowing, Debt Sustainability, and Investment Priorities
- Proposed NCB ceiling:
  - Proposed new cumulative non-concessional borrowing ceiling of $250 million for FY 2014/15 to cover projects in water, electricity, and transport.
  - DSA scenario assumptions: full $250 million used in FY2014/15; phased nonconcessional borrowing of $750 million spread equally over 2016-18.
  - Keeping $250 million limit would maintain Rwanda at low risk of debt distress per updated DSA analysis.
- Investment priorities:
  - Energy: reduce electricity costs via hydro and geothermal; Nyaborongo hydro plant expected to contribute; plans for solar and methane; power purchase agreements signed.
  - Housing: affordable housing initiated in Kigali with national plans.
  - Airport, regional oil pipeline, and railway projects in planning/early stages; financing structure for large projects to be hybrid public–private.
- Fiscal risks highlighted:
  - Scaling up investment including PPPs can create budget pressure and contingent liabilities.
  - SOEs as sources of fiscal risk: EWSA (high diesel generation costs) and Rwandair (small size, high fuel costs, reliance on fiscal transfers).

### Fund Recommendations on Taxing Agriculture, Mining, and Property (Box 2)
- Agriculture:
  - Recommendation to develop and implement a presumptive turnover tax in line with existing 3 percent turnover tax and simplified graduated fee for micro enterprises.
  - Proposed application threshold: turnover estimates above Rwf 360,000.
  - Implementation support: data verification via agricultural producer cooperatives (more than 3,000).
  - Estimated yield: applying a 3 percent turnover tax to farms with more than 2 hectares could yield over Rwf 7 billion (about 0.2 percent of GDP in FY2015/16).
- Mining:
  - Maintain royalty tax but eliminate tax discount for mining companies.
  - Review erosion avenues: transfer pricing, thin capitalization rules, and lack of ring fencing.
  - Strengthen monitoring/auditing of transactions between miners and traders.
- Property (Fixed Asset Tax, FAT):
  - Expand FAT coverage to all property within urban districts, notably Kigali.
  - Centralize FAT administration within a Central Valuation Department.
  - Yield estimates:
    - Urban resident payers would increase by 135 percent; corporations paying would rise by almost 300 percent.
    - Estimated yield: 0.2 percent of GDP in FY2015/16 with higher medium-term yields.

### Monetary Policy, Exchange Rate, and Financial Sector
- Monetary policy:
  - NBR policy rate maintained at 7.5 percent since June 2013.
  - 2014 monetary program targets: reserve and broad money growth about 14.5 percent by year-end; credit to private sector projected to pick up from 13 percent at end-March 2014 to 16 percent at end-year.
  - NBR committed to greater exchange rate flexibility; spread between official and market rates targeted below 2 percent.
- Market and liquidity measures:
  - NBR issued treasury bills with maturities of six months and above and established a 2014 bond issuance calendar.
  - After an over-subscribed 3-year bond, planned 5-, 7-, and 10-year issuances in 2014; secondary market trading restarted.
  - NBR published its first quarterly inflation report in early-April.
- Financial sector developments:
  - Credit to private sector slowed to 10.8 percent in 2013, after expanding by 34 percent in 2012; recovered to 13 percent year-on-year in March 2014 (policy discussion).
  - Rwandan Franc depreciation: 6.1 percent in 2013, following 6 percent in 2012.
  - NPLs peaked in Q3 2013; NPL situation stabilized subsequently but varies across banks.
  - Legal and supervisory reforms: revised central bank law to extend supervisory reach; banking law amendments; new laws in pipeline: deposit insurance, insurance, and pensions.
  - Financial inclusion: FSDP implementation ongoing; plans to consolidate SACCOs in one cooperative in 2015.

### Program Performance, Structural Benchmarks, and TMU Highlights
- Program performance:
  - Compliance with end-December quantitative criteria and structural benchmarks satisfactory except ceiling on non-concessional borrowing.
  - Non-observance of NCB ceiling due to Rwandair contracting a new foreign aircraft lease ($18.2 million) in February 2014.
  - All indicative targets met except a slight breach of the domestic debt ceiling associated with donor financing delays.
- Structural benchmarks met for first review:
  - Issuing treasury bills with maturities of six months and above.
  - Publishing money market rates.
  - Gathering high frequency data.
  - Plan for strengthening monetary and exchange rate operations.
  - Publication of quarterly inflation report.
- MEFP/TMU adjustments:
  - MEFP Table 1 updated with new end-June QACs and indicative targets for second review and end-December under the PSI.
  - Domestic revenue target now excludes revenues from peace keeping operations.
  - Adjuster for domestic debt on unused Eurobond proceeds eliminated.
  - Proposed new structural benchmark: publish quarterly reports of budget execution against annual fiscal objectives on MINECOFIN’s website.
- Selected quantitative figures (Table 1, preserved exactly where provided):
  - Net foreign assets of the NBR at program exchange rate (floor on stock): Dec. 2013 Actual: 511.7; Dec. 2013 Prog: 541.0; Dec. 2013 Adj. Prog: 597.7; Difference: 56.7; Status: Met; June 2014 Prog: 459.0; June 2014 Adj. Prog: 519.7; June 2014 Assessment: 516.3.
  - Reserve money (ceiling on stock) (upper bound): Dec. 2013 Actual: 218.0; Dec. 2013 Prog: 218.0; Dec. 2013 Adj. Prog: 210.8; Difference: 7.2; Status: Met; June 2014 Prog: 231.1; June 2014 Adj. Prog: 229.3; June 2014 Assessment: 242.7.
  - Net domestic financing (ceiling on flow): Dec. 2013 Actual: 22.2; Dec. 2013 Prog: -7.1; Dec. 2013 Adj. Prog: -84.5; Difference: 106.7; Status: Met; June 2014 Prog: 86.7; June 2014 Adj. Prog: 162.8; June 2014 Assessment: 152.9.
  - New nonconcessional external debt contracted or guaranteed by the public sector (US$ millions) (ceiling on stock): Dec. 2013 Actual: 0.0; Dec. 2013 Prog: 0.0; Dec. 2013 Adj. Prog: 18.2; Difference: 18.2; Status: Not Met; June 2014 Prog: 0.0; June 2014 Adj. Prog: 250.0; June 2014 Assessment: 250.0.
  - Domestic revenue collection (floor on flow): Dec. 2013 Actual: 787.1; Dec. 2013 Prog: 787.1; Dec. 2013 Adj. Prog: 799.0; Difference: 11.9; Status: Met; June 2014 Prog: 466.4; June 2014 Adj. Prog: 415.4; June 2014 Assessment: 882.
  - Consolidated domestic debt of public sector (ceiling on stock, eop): Dec. 2013 Actual: 337.3; Dec. 2013 Prog: 308.0; Dec. 2013 Adj. Prog: 312.2; Difference: 4.2; Status: Not Met; June 2014 Prog: 337.6; June 2014 Adj. Prog: 371.8; June 2014 Assessment: 363.5.
  - Total priority spending (floor on flow): Dec. 2013 Actual: 587.1; Dec. 2013 Prog: 587.1; Dec. 2013 Adj. Prog: 595.3; Difference: 8.2; Status: Met; June 2014 Prog: 357.1; June 2014 Adj. Prog: 349.1; June 2014 Assessment: 683.5.
  - Memorandum: Euro bond (US$ millions): 400.0; Unused euro bond proceeds (US$ millions): Dec. 2013 Actual: 121.2; Dec. 2013 Prog: 172.4; Dec. 2013 Adj. Prog: 51.2.
- TMU program exchange rates for accounting (end-December 2013 rates, apply for 2014):
  - Rwanda Franc (per US$) 670.1
  - Euro 1.3791
  - British Pound 1.6375
  - Japanese Yen (per US$) 103.4116
  - SDR 1.5383

### Program Conclusion, Staff Appraisal, and Recommendations
- Staff recommends completion of the first review under the PSI and supports a waiver for the non-observance of the continuous QAC on non-concessional borrowing given its small size and corrective actions.
- Staff appraisal key points:
  - Satisfactory PSI performance despite weak growth; all but one QAC met.
  - Growth expected to pick up in 2014 but downside risks remain.
  - Authorities appropriately cautious given reduced policy buffers: limiting domestic financing and maintaining interest rates unchanged.
  - Greater exchange rate flexibility has helped preserve import cover at over 4 months.
  - Authorities encouraged to broaden the tax base over the next two years via agricultural and property tax measures and to publish size and impact of tax expenditures.
  - Staff underscores need to carefully select and prioritize investment projects to maintain fiscal space for larger regional investments.

*Source: Excerpts from the IMF staff report (CR/14/185) on Rwanda (document _cr14185).*

### 1. The Effects of Rebasing Gross Domestic Product________________________________________________5

### 1. The Effects of Rebasing Gross Domestic Product

### The Context
- Rwanda was affected by the reduction in budget support during FY12/13, with spillovers on the government’s investment program and the services sector.
- Weak agricultural growth in the second half of 2013 resulted in the weakest growth rate in a decade.
- The shock to foreign aid in FY12/13 required the government to use some foreign exchange reserves to cushion the impact on growth.
- Outlook for foreign financing (In percent of GDP):
  - Grants: 7.9 (2012/13), 9.1 (2013/14), 9.5 (2014/15), 7.4 (2015/16)
  - Project loans: 7.7 (2012/13), 2.4 (2013/14), 2.1 (2014/15), 3.6 (2015/16)
  - Of which: sovereign bond 5.5
  - Total: 15.6 (2012/13), 11.5 (2013/14), 11.6 (2014/15), 11.0 (2015/16)
  - Excluding sovereign bond: 10.1 (2012/13), 11.5 (2013/14), 11.6 (2014/15), 11.0 (2015/16)
- Authorities prioritized projects, identified those requiring non-concessional financing, and requested an increase in borrowing room in the coming fiscal year.

### Recent Developments — Growth and Inflation
- Real GDP grew by 4.6 percent in 2013 amid poor agricultural performance and delays in budget support disbursements that affected investment and services (services account for about half of GDP).
- The real GDP series was rebased to 2011; the exercise had limited effect on the level of GDP, which rose by 1 percent relative to earlier estimates.
- Inflation:
  - Year-on-year headline inflation: 3.6 percent in 2013.
  - Inflation in March 2014: 3.4 percent.
  - Inflation expected around the central bank’s target of 5 percent by the end of the year.

### Box 1 — Rebasing of National Accounts (Highlights)
- National Statistics Institute rebased national accounts from 2006 to 2011 base prices.
- Improvements included:
  - Introduction of the intermediate consumption matrix.
  - Estimates of informal cross-border trade.
  - New estimates for the construction sector.
  - Estimates of crop production from the new Seasonal Agricultural Survey, including season C for the first time.
  - Better estimates for livestock sector output including increases in stocks (capital formation).
- Effects of rebasing:
  - Very slight changes in growth rates prior to 2010, but slower growth rates subsequently.
  - Slower growth rates partly due to lower agricultural sector growth rates in 2011 base prices; agriculture accounts for around a third of total output.
  - Revisions raised nominal GDP by less than 1 percent.
  - Agricultural and industrial sectors’ contributions to output for 2006–2012 were less than suggested by 2006-price based GDP.
  - Services averaged 46 percent of total output (2011 prices) between 2006 and 2012, relative to 45 percent in 2006 prices over the same period.
- Note: Quarterly GDP data based on the updated prices will be released in June 2014.

### Recent Developments — Balance of Payments
- The current account improved considerably in 2013; Eurobond issuance helped raise import cover to above four months.
- Improvement driven by strong export growth, mainly in mining, and flat imports.
- Flat imports reflected delays in government-financed projects (especially the Kigali Convention Center) and weakness in private consumption.
- Rebound in public sector external grants also strengthened the current account.

### Recent Developments — Fiscal
- Fiscal position switched to a surplus in the second half of 2013 due to lower wages and capital spending, and sharply lower net lending.
- Total revenues were close to initial targets due to larger than expected disbursements for Rwanda’s role in peace-keeping operations.
- Grants were above expectations due to a sharp increase in Global Fund disbursements.
- Overall spending was lower than expected because of delays in recruitments and capital projects, although capital spending has surged relative to current spending in recent years.
- Net lending was sharply curtailed because of slower pace in building the convention center.

### Recent Developments — Monetary Policy, Exchange Rate, Financial Sector
- National Bank of Rwanda (NBR) policy rate: maintained unchanged at 7.5 percent since June 2013.
- Rationale: keep inflationary pressures subdued and avoid pressures on the foreign exchange market from too rapid an increase in credit to the private sector.
- Market rates (interbank and government treasuries) have been declining; lending rate rigidities have increased real rates.
- Credit to the private sector slowed to 10.8 percent in 2013, after expanding by 34 percent in 2012.
- Reserve money was in line with the target.
- Exchange rate policy: NBR allowed currency to be driven primarily by market conditions.
  - Rwandan Franc depreciation: 6.1 percent in 2013, following 6 percent in 2012.
  - Spread between official and market rates is now below 2 percent.
- Financial sector:
  - Non-performing loans (NPLs) peaked in Q3 2013; pressures from slowdown in government projects and prior rapid credit growth.
  - Overall returns on assets and equity declined in 2013.
  - Banks faced higher financing conditions due to increase in Treasury bill rates in H1 2013; deposit rates rose and remain high until mid-2014.
  - One bank had managerial problems requiring recapitalization.

### Program Performance
- Compliance with end-December quantitative criteria and structural benchmarks was satisfactory except for the ceiling on non-concessional borrowing.
  - Non-observance of NCB ceiling due to Rwandair contracting a new foreign aircraft lease ($18.2 million) in February 2014.
  - All indicative targets met except the domestic debt ceiling (slight breach associated with delays in donor financing disbursements).
- Five structural benchmarks for the first review were met:
  - Issuing treasury bills with maturities of six months and above.
  - Publishing money market rates.
  - Gathering high frequency data.
  - Plan for strengthening monetary and exchange rate operations.
  - Publication of quarterly inflation report.
- Staff recommendation: strengthen communication of borrowing plans between parastatals and the Ministry of Finance, and between the government and the IMF to avoid recurrence of NCB ceiling breach.

### Policy Discussions — Outlook
- Short-term outlook:
  - Growth weakness in 2013 expected to be temporary.
  - Agricultural growth expected stronger in current year due to favorable first (season A) harvest and assessed increase in agricultural acreage of about 5 percent.
  - Expected catch-up in implementation of government projects should help return activity to normal levels.
  - Private sector credit recovered to 13 percent year-on-year in March.
  - Leading indicator of the economy (beer, electricity and cement consumption, real VAT receipts and imports, and export volume of commodities) picked up in first three months of 2014, but turnaround magnitude is slow.
  - Staff projects growth this year to reach 6 percent.
- Medium-term outlook:
  - Risks heavily weighted to the downside in short term (agricultural output and project implementation).
  - Medium term positive: rising private sector interest (horticulture, food exports) could support export diversification and relieve balance of payments constraint.
  - Government actions to increase arable land, supply improved seeds and fertilizer, and new electricity and secondary road projects coming on stream could support industrial sector.
  - Under these conditions, medium term growth rate of 7.5 percent is achievable.

### Policy Discussions — Economic and Fiscal Policies
- Authorities intend to speed up investment program while maintaining a prudent fiscal plan through the end of the year.
- Monetary policy: NBR agreed on need to maintain exchange rate flexibility and prevent buildup of pressures in the foreign exchange market.
- FY2013/14 supplementary budget:
  - Budget deficit estimate for whole fiscal year is lower by ½ percent of GDP to 4.5 percent of GDP.
  - Supplementary budget provided slight expenditure boost in recurrent spending, more than offset by delays in net lending.
  - Projected increases in current spending (excluding exceptional spending) about 0.3 percent of GDP (subscriptions, financial support for 20 year commemoration, hosting AfDB meetings).
  - Additional expenditure budgeted for peace keeping operation in CAR and additional troops for South Sudan: 0.7 percent of GDP (covered by donor budget support and reimbursements).
  - Delays in net lending reflect postponement of convention center expenditures to second half of 2014.
- FY2014/15 budget stance:
  - Authorities favor a cautious budget based on available resources to prevent foreign exchange market pressures and limit crowding out of private credit.
  - Expenditures kept at about 30 percent of GDP.
  - Net lending increased by 1 percent of GDP mainly to finance completion of Kigali Convention Center and export promotion.
  - Expenditure containment partly through reversal in peace keeping operations (-0.6 percent of GDP) and transfers (-0.2 percent of GDP).
  - With surge in revenues from policy changes, budget deficit projected to fall to slightly below 3 percent of GDP.
  - Authorities will revisit fiscal stance at supplementary budget for 2014/15 if growth fails to pick up.

### Tax Policy and Revenue Measures
- Rwanda’s tax ratio: 14.2 percent in 2012/13.
- Under PSI, authorities aim to raise tax ratio over time; expect to reach initial milestone of 14.9 percent of GDP by end of fiscal year (compared to target of 15.1 percent).
- Standard estimates: tax revenue ratio falls by 0.15 percent of GDP for each 1 percent of growth below potential.
- Authorities expect to raise tax revenue ratio by 0.9 percent of GDP in 2014/15:
  - 0.2 percent of GDP from imposition of excise taxes on mobile airtime and introduction of a royalty tax on mining.
  - 0.5 percent of GDP from introduction of local authority tax collection at central government level (no net effect on fiscal balance because equivalent amount returned to local authorities in transfers).
  - Start of VAT collection from electronic billing machines supports net tax increase.
- Tax momentum into 2015/16:
  - Expected introduction of a tax on agriculture and better yields from property tax currently in place.
  - Projected yield about 0.4 percent of GDP.
  - Together with VAT improvements and expansion of electronic billing machines, increase in net taxes could reach up to 1 percent of GDP in 2015/16.
- Staff requested authorities produce a report on their tax measures by end June 2014 based on recent Fund TA mission findings.

### Investment Plans and Debt Sustainability
- Authorities identified investment projects to support EDPRS 2 objectives in energy, water, housing, and transportation.
- Energy priorities:
  - Reduce electricity costs by switching from expensive fuel to hydro and geothermal generation.
  - Development of Nyaborongo hydro plant expected to contribute in the year.
  - Plans also to develop solar and methane energy; power purchase agreements signed with some companies.
- Housing: provision of affordable housing initiated in Kigali with plans to spread nationally.
- Airport plans ongoing and negotiations with interested parties continuing.
- Regional projects (regional oil pipeline and railway) are in early stages.

*Source: _cr14185 - 1. The Effects of Rebasing Gross Domestic Product*

### 20.      Staff acknowledged the large investment needs of the government, and, in line with

### 20.      Staff acknowledged the large investment needs of the government, and, in line with

### Non-concessional borrowing and investment prioritization
- Proposed new cumulative non-concessional borrowing ceiling of $250 million for FY 2014/15 to cover projects in water, electricity, and transport while preserving space for additional projects.
- The limit aims to provide flexibility and help avoid recurring small misses of the NCB limit.
- Keeping the $250 million limit would maintain Rwanda at low risk of debt distress as shown in the updated DSA analysis.
- DSA scenario notes:
  - Assumes the full $250 million in external borrowing is used in FY2014/15.
  - Assumes a phased nonconcessional borrowing of $750 million spread out equally over 2016-18.

### Box 2 — Fund recommendations on taxing agriculture, mining, and property
- Context:
  - Despite recent weakness in economic activity, maintain momentum on tax collection in face of possible decline in foreign aid over the medium term.
  - Authorities identified three areas with potential for significant yields: agricultural sector taxation, amendments to the mining royalty tax regime, and expanding the fixed asset tax (FAT) to cover all property in urban districts.
- Agriculture:
  - Agricultural sector comprises about a third of output in Rwanda and is not taxed.
  - Recommendation: develop and implement a presumptive tax on turnover in line with the existing 3 percent turnover tax and simplified graduated fee regime for micro enterprises.
  - Proposed application: turnover estimates above Rwf 360,000 (comparable to current estimates for micro enterprises).
  - Implementation support: data verification of individual farmers’ sales to respective agricultural producer cooperatives (more than 3,000).
  - Estimated yield: applying a 3 percent turnover tax to total agricultural turnover for farms with more than 2 hectares could yield over Rwf 7 billion (about 0.2 percent of GDP in FY2015/16).
- Mining:
  - Current royalty tax is appropriate but amendments could reduce erosion of corporate tax base.
  - Recommendations:
    - Eliminate the tax discount for mining companies.
    - Review avenues for erosion of corporate taxes: transfer pricing, generous thin capitalization rules, and lack of ring fencing.
    - Strengthen monitoring and auditing of transactions between miners and traders due to considerable undocumented activity and revenue loss.
- Property (Fixed Asset Tax, FAT):
  - FAT includes land and buildings and is based on self-declaration; currently assessed only on properties with full title ownership and applies to only 3 percent of all parcels.
  - Recommendation: increase the number of properties assessed under the FAT; make all property within urban districts, in particular Kigali, liable to the FAT.
  - Administrative recommendation: centralize FAT administration within a small Central Valuation Department inside the Lands and Mapping Department due to lack of capacity at district and sector levels.
  - Yield estimates:
    - If urban properties currently paying the land lease fee pay the FAT, number of residents paying the FAT would increase by 135 percent.
    - Number of corporations paying would rise by almost 300 percent.
    - Estimated yield from this change: 0.2 percent of GDP in FY2015/16 with higher yields projected over the medium term.

### Box 3 — Fiscal risks
- Definition and scope:
  - Fiscal risks: possibility that fiscal outcomes differ from projections; covers institutional coverage, frequency of reporting, timeliness of annual accounts, quality of external audit, fiscal forecasting and budgeting, and fiscal risk disclosure.
  - Staff is enhancing work on potential sources of fiscal risks in Rwanda with further results expected over the coming year.
- Institutional strengths:
  - Institutional coverage at the general government level.
  - Frequency of in-year reporting: quarterly.
  - Fiscal accounts based on the GFSM 2001.
  - Uses gross budgeting; regulated budget calendar with time for scrutiny; supplementary budget required before new spending is allowed.
  - Requires quarterly reports from sub-national governments and Minister of Finance authorization for any borrowing by sub-national units.
- Sources of fiscal risk:
  - Scaling up of investment, including through PPPs under EDPRS2, can create budget pressure and contingent liabilities.
  - Regional investment projects may require government support via direct transfers or guarantees.
  - State owned enterprises (SOEs) are a source of fiscal risk:
    - EWSA (electricity and water): high electricity generation costs (over 50 percent diesel) causing fiscal pressure; expectation of cheaper hydropower and prospective imports from Ethiopia to alleviate costs.
    - Rwandair (national airline): positioning as a regional carrier; small size and high fuel costs lead to reliance on fiscal transfers to carry investment plans, development strategy, and cash flow.

### Monetary and exchange rate policy
- Agreement to maintain current monetary stance.
- 2014 monetary program targets:
  - Reserve and broad money growth at about 14.5 percent by year-end.
  - Growth in credit to the private sector projected to pick up from 13 percent at end-March 2014 to 16 percent at end-year.
- Authorities reiterated commitment to greater exchange rate flexibility to preserve policy buffers.
- Measures to improve monetary framework and transmission:
  - NBR started issuance of treasury bills with longer maturities to absorb excess liquidity and established a 2014 bond issuance calendar.
  - After an over-subscribed 3-year bond in early 2014, three more quarterly issuances with maturities of 5-, 7-, and 10- years planned for 2014.
  - Secondary market trading restarted following the bond issuance.
  - NBR working on architecture to facilitate interbank transactions and build commercial bank staff capacity based on MCM TA recommendations consistent with PSI objectives.
  - NBR published its first quarterly inflation report in early-April to improve communication with market participants on monetary policy.

### Financial sector developments
- Impact of economic slowdown:
  - Rising non-performing loans (NPLs) and increased banks’ financing costs led to decreases in returns to assets and equity.
  - NPL situation has stabilized recently, but differences exist across bank portfolios.
  - NBR confident that implementation of guidelines to tackle NPLs will have a positive sector impact.
- Legal and supervisory framework enhancements:
  - Revised central bank law to be submitted to parliament; extends supervisory reach to pension funds and insurances.
  - Corresponding changes to banking law and underlying regulations.
  - NBR participating in cross-border bank supervisions.
  - New laws in pipeline: deposit insurance, insurance, and pensions.
- Financial inclusion and development:
  - Implementation of the financial sector development plan ongoing.
  - Capital markets authority working to attract more investors, including from the region.
  - Plans to consolidate SACCOs in one cooperative in 2015 remain on track.

### Program issues and staff appraisal
- MEFP adjustments:
  - MEFP Table 1 contains new end-June QACs and indicative targets for the second review and end-December under the PSI, consistent with the macro framework and staff understandings.
  - Differences from first review:
    - Domestic revenue target now excludes revenues from peace keeping operations due to timing beyond authorities’ control.
    - Adjuster for domestic debt on unused Eurobond proceeds eliminated because proceeds will be used to finance imports and have minimal bearing on domestic debt.
  - Structural benchmarks remained with addition of proposed benchmark on publishing quarterly reports of budget execution against annual fiscal objectives on MINECOFIN’s website.
- Staff appraisal findings:
  - Authorities commended for satisfactory performance under the PSI despite weak growth; all but one QACs met (non-concessional borrowing target missed because of a small aircraft lease).
  - Growth expected to pick up in 2014, but downside risks remain.
  - Given reduced policy buffers, authorities appropriately cautious in limiting domestic financing and maintaining interest rates unchanged.
  - Greater exchange rate flexibility has helped preserve import cover at over 4 months of imports.
  - FY2014/15 budget framework aligned with PSI objectives: expenditures broadly flat relative to GDP and additional domestic revenues mobilized to support EDPRS2 and complete delayed infrastructure projects.
  - If growth falters, consider options to support the economy via the FY2014/15 supplementary budget.
  - Authorities applauded for maintaining plans for enhanced domestic revenue mobilization; encouraged to broaden tax base over next two years by adopting tax measures on agricultural and property taxation and publishing size and impact of tax expenditures.
  - Monetary policy stance considered appropriate; legal and supervisory banking reforms on track.
  - Current PSI supports increased infrastructure investments in energy, water, housing, and transportation.
  - Borrowing limit understanding through end of FY2014/15 reflects Rwanda’s low risk of debt distress.
  - Staff underscores need to carefully select and prioritize investment projects to maintain space for larger regional investments coming on stream later.

*Source: IMF staff report excerpt (CR14185).*

### 33.      Staff recommends the completion of the first review under the PSI. Staff supports the

### _cr14185 - 33.      Staff recommends the completion of the first review under the PSI. Staff supports the

### Program recommendation and compliance
- Staff recommends the completion of the first review under the PSI.
- Staff supports the waiver for the non-observance of the continuous QAC on non-concessional borrowing due to its small size and corrective action taken by the authorities in terms of coordinating investment plans between government agencies.

### Recent economic performance (high-level findings)
- Growth: "Growth has been resilient, until recently..." (Figure annotations).
- Inflation: "Core and headline inflation have remained stable..." and "while inflation remains below that of other EAC countries." (Figures 1 and 2 annotations).
- External sector: "The trade deficit moderated in 2013 associated with the weak economy... but aid flows were also lower." (Figure 2 annotations).
- Reserves and exchange rates: "International reserves remain adequate..." and "...the Rwandan Franc has continued to depreciate against the U.S. dollar." (Figure 2 annotations).
- High-frequency indicators: "Growth is pulling up following the weakness in 2013, but cement production and imports are still flat. Electricity consumption and VAT receipts have picked up, ... as have mining exports as a result of strong investment." (Figure 3 annotations).

### Monetary and fiscal developments
- Monetary policy and liquidity:
  - "The NBR has kept the policy rate unchanged since June 2013."
  - "Real interest rates remain mostly positive even taking into account expected inflation."
  - "T-bill rates have declined, reflecting reduced demand from government."
  - "Markets have amply liquidity." (Figure 6 annotations).
- Fiscal developments:
  - "The fiscal deficit widened in 2012/13, ... reflecting low grants compensated by a moderate pickup in revenue."
  - "Priority spending on health, education, and social protection has been maintained, ... while capital spending continues to outpace current spending." (Figure 4 annotations).
  - Fiscal stance: "The fiscal position is expected to improve, ... due to enhanced revenue mobilization." (Figure 7 annotation).

### Medium-term outlook and projections (selected qualitative projections)
- Growth outlook: "GDP growth is projected to return gradually to the trend growth,..." (Figure 7).
- Inflation outlook: "...with inflation expected to rise toward the authorities' target." (Figure 7).
- External position: "The current account is expected to improve as large investment projects are completed,... and reserve coverage is expected to remain adequate." (Figure 7).
- Fiscal outlook: "The fiscal position is expected to improve,... due to enhanced revenue mobilization." (Figure 7).

### Debt and external sustainability (summary of staff analysis)
- External debt: "External debt remains relatively low." (Figure 4 annotation).
- Debt dynamics and stress tests: Figures and the External Debt Sustainability Framework show baseline projections and alternative stress scenarios for 2014–34, including indicators such as PV of debt-to-GDP, PV of debt-to-exports, debt service ratios, and debt accumulation under shocks. (Figures 7, 8 and Table in the DSA section).

_Italic: Source — Excerpts from the IMF staff report (CR/14/185) on Rwanda (figures, tables, and captions as provided in the source content)._

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Recent economic and policy performance (through end-December 2013)
- Growth slowed to 4.6 percent in 2013 due to adverse weather affecting agriculture, spillovers from an aid shock, and delays in some major government-financed projects.
- Inflation remained well contained throughout 2013:
  - Headline inflation: 3.7 percent year-on-year in December 2013.
  - Core inflation: 3.8 percent in December 2013.
  - Inflation at end-March 2014: 3.4 percent.
- Sectoral growth in 2013:
  - Agriculture: 3 percent (same as in 2012).
  - Services (45 percent of GDP): 4 percent.
  - Industry: 11 percent (led by construction and beverage industry).
  - Mining: 41 percent.
- Domestic demand indicators in 2013:
  - Total consumption fell (-1 percent).
  - Investment stagnated (1 percent).
- External and reserves:
  - Reserves stabilized at 4.8 months of imports, helped by favorable current account developments and unused Eurobond proceeds.
- Fiscal developments (first half of FY 2013/14):
  - Total revenue and grants exceeded projections by about 1.5 percent of GDP.
  - Domestic tax revenue: 13.7 percent of GDP (0.6 percent of GDP below program target).
  - Fiscal accounts recorded a surplus of 0.4 percent of GDP for the first half of FY 2013/14 (initially estimated deficit of 4.8 percent of GDP).
  - Repayment by Rwandair to government: RWF 32.5 billion, which curtailed net lending.
- Monetary indicators:
  - Credit to private sector increased by 10.8 percent (year-on-year) versus an initial projection of 14.3 percent.
  - Broad money growth: 15.5 percent in 2013.
  - Exchange rate: Rwandan Franc depreciated by 6.1 percent.
  - Net foreign assets were higher than targeted.
- Program performance under the PSI:
  - All but one end-December 2013 quantitative assessment criteria (QAC) were met.
  - The continuous QAC on non-concessional borrowing was not observed when Rwandair financed the lease of an airplane.
  - All structural benchmarks associated with the review were met.

### Macroeconomic outlook and projections for 2014 and FY2014/15
- Growth and inflation projections for 2014:
  - Real GDP growth projected to recover to 6 percent in 2014.
  - Agriculture growth projected at 5 percent in 2014.
  - Industry growth projected at 6 percent in 2014.
  - Services growth projected to recover from 4 percent (2013) to 7 percent (2014).
  - Sub-sector projections for 2014:
    - Wholesale and retail trade: 8 percent.
    - Real estate and business services: 4 percent.
  - Inflation forecast: 5 percent (in line with NBR target).
- External sector projections for 2014:
  - Current account deficit projected to widen from 7.2 percent of GDP in 2013 to 12.1 percent of GDP in 2014.
  - Foreign reserves coverage projected to be around 4 months of imports.
  - Financing of increased imports: primarily from unused Eurobond proceeds allocated to the Kigali Convention Center and the Nyaborongo hydro project.
- Fiscal projections and framework:
  - Original revenue ratio target of 15.1 percent of GDP is unlikely to be fully met in FY 2013/14.
  - Total expenditure projected at 31.2 percent of GDP in FY 2013/14.
  - For FY2014/15:
    - Total expenditure and net lending estimated at RWF 1696.9 billion (29.5 percent of GDP).
    - FY 2013/14 total expenditure given as RWF 1593.2 billion (31.2 percent of GDP).
    - Recurrent expenditure estimated at RWF 814 billion (increase of RWF 38.8 billion compared to FY 2013/14).
    - Capital expenditure estimated at RWF 782.2 billion (RWF 58.5 billion higher).
    - Overall deficit (including grants) expected to decline to 3.1 percent of GDP in FY2014/15 (from 5.3 percent of GDP in FY13/14).
    - Net domestic cash finance of the 2014/15 budget expected to be around RWF 69.6 billion (1.2 percent of GDP).
  - Budget support assumption for FY2014/15: around 9.5 percent of GDP.
  - Contingency: if revenue rebound in the second half of FY 2013/14 does not materialize, the government may use additional domestic finance while ensuring it does not “crowd out” the private sector.

### Fiscal policy measures and revenue mobilization
- Revenue mobilization priorities:
  - Accelerate domestic revenue mobilization given donor uncertainty.
  - By end-June 2014, assess FAD recommendations on agriculture, mining, and property taxes and consider those implementable within a defined time frame.
  - Target introduction of these regimes into the fiscal framework by FY2015/16.
  - Consider additional revenue measures to generate an extra 0.4 percent of GDP in FY 2015/16.
  - Goal: take tax revenue collections to over 17 percent of GDP.
- Specific structural revenue measures to be implemented over the next two years:
  - Investment code (approved in March 2014 by Cabinet) to come into effect in FY2014/15 with additional tax revenue starting FY2015/16; key changes include:
    - (i) Cabinet may no longer grant a blanket discretionary incentive package.
    - (ii) VAT exemption for investment certificates holders no longer apply.
    - (iii) Incentives related to customs duties aligned with EAC regulations and procedures; investors granted such incentives prior to Rwanda’s accession to the EAC would also be subject to the new code.
    - (iv) Investment thresholds (100,000USD for local investors and 250,000USD for foreign investors) no longer apply; fiscal incentives provided to specific sectors.
    - (v) Provision granting tax discount depending on number of employees removed.
    - (vi) Flat tax of 5 percent on building and finishing materials (in lieu of import duties and excise for construction projects worth of at least 1.8 M USD) aligned with EAC regulations such that the Common External Tariff now applies.
    - (vii) Tax on capital gains scrapped; income from sale of properties to be incorporated in taxable income of the company.
  - A tax expenditure assessment to cover customs and budget tax expenditures to be submitted with the FY2014/15 budget.
  - VAT law to be amended to reduce exemptions; draft to be submitted to the IMF for comments before Cabinet submission.
  - Enforcement of taxpayer compliance via administrative measures highlighted in the November 2013 MEFP.
  - Divestiture plans:
    - Government will divest from the Rwanda Development Bank and foster greater private sector participation; negotiations ongoing with a strategic investor and an MOU was recently signed.

### Public financial management and institutional measures
- IFMIS extension to 20 development projects.
- Review of local government block grant formula:
  - Local government revenue potential study completed in November (delayed from March 2013).
  - Consultations on LGRPS implementation strategy planned for May 2014; new block grant formula to be prepared and submitted to Cabinet to inform FY 2015/16 budget processes.
- Financial reporting of sub-national entities:
  - A reporting template issued to all sectors; SEAS (Subsidiary Entities Accounting System) developed.
  - SEAS implemented in 8 districts; 88 sectors using it for payments, accounting, and reporting.
  - SEAS to be implemented in all sectors by August 2014.

### Non-concessional borrowing (NCB) and financing of strategic projects
- Given uncertainties in donor grants and concessional funding, the government will seek non-concessional finance for some strategic investment projects critical to EDPRS 2 objectives.
- To avoid breaching the current ceiling on non-concessional borrowing during the PSI period, the government requests an increase of US$ 250 million on the existing level for FY 2014/15 to finance and implement envisaged investment projects.
- The government reiterates commitment to reinforcing procedures on non-concessional borrowing by public entities, requiring all public entities to consult early with and seek approval from the Ministry of Finance and Economic Planning for contracting external loans.

### Program engagement and commitments
- The Government requests completion of the first review under the PSI and a waiver for the non-observance of the QAC on non-concessional borrowing.
- Commitment to consult with the IMF before adopting any further measures or changes to policies described in the MEFP.
- Expectation that the second review will take place before end-December 2014.
- The Government authorizes publication and distribution of this letter, its attachments, and all reports prepared by IMF staff.

*Appendix I. Letter of Intent — Kigali, April 25, 2014.*

### 17.      The government’s public investment program gives the highest priority to projects for

### _cr14185 - 17.      The government’s public investment program gives the highest priority to projects for

### Public investment priorities and large infrastructure
- Highest priority projects: water, energy, and affordable housing.
- Government will keep the Fund informed on the financing structure and implementation of these projects.
- Expansion of national airline Rwandair is viewed as critical to medium-term plan to build a new international airport at Bugesera and to increase revenue from services, particularly tourism.
- Financing structure for the airport project and other large medium-term infrastructure projects (railway and oil pipeline) will be a hybrid of public and private financing.
- These larger projects will be completed beyond the current PSI period; the government indicates the current NCB ceiling may need to be renegotiated again as and when financing for these projects is finalized.
- As the level of non-concessional debt increases, the government will monitor debt sustainability.

### Monetary policy stance and exchange rate (NBR)
- NBR will maintain a prudent monetary policy stance during 2014 to anchor inflationary expectations, support growth, and contain pressures on the currency.
- Private sector credit is expected to pick up in 2014 as the economy reverts to its potential.
- The exchange rate will remain market driven; NBR will continue to allow greater exchange rate flexibility to:
  - maintain the spread between the official and market rate below 2 percent, and
  - ensure reserve levels remain comfortable (at a minimum level of 4 months of prospective imports (CIF)).

### Strengthening the monetary policy framework
- NBR will continue implementation of policies to tackle structural excess liquidity.
- NBR has started issuing instruments with longer-term maturities and published a quarterly bond issuance calendar for bonds with longer term maturities.
- Recent issuance: oversubscribed bond; secondary market activities picked up.
- Policies to improve the interbank market and build capacity at commercial banks will be accelerated.
- NBR committed to boost the interbank market by supporting the dealer’s association to establish a code of conduct governing interbank operations in local and foreign currency.
- NBR will sustain capacity building and modeling efforts to better understand transmission mechanisms and inform Monetary Policy Committee decisions.
- NBR will continue policies to strengthen its communication process, including dialogue with foreign exchange market players.
- NBR recently published its first quarterly inflation report.

### Financial sector policies and supervision
- Policies to tackle increase in non-performing loans have proved effective; commercial banks will continue to comply with new guidelines and implement recovery plans.
- NBR will continue off-site surveillance and on-site examinations under risk-based supervision; capacity building for bank supervisors will be sustained.
- Given the increasing importance of cross-border banks, NBR will increase participation in supervisory colleges to conduct joint on-site inspection of cross-border banks.
- Ongoing efforts to increase financial inclusion and deepening will be sustained, particularly through implementation of the Financial Sector Development Plan (FSDP2).

### Legal and regulatory framework reforms
- NBR law and the banking law are nearing final stages and will be implemented in FY2014/15. Draft approved by NBR’s Board in December 2013; approved document under translation for transmission to MINECOFIN for cabinet approval and before submission to Parliament for ratification.
- Implementation will lead to development of new regulations or updates of existing ones for the New Banking Law.
- NBR’s Board approved the Deposit Insurance Law; tracking for finalization and development of implementing regulations will continue.
- Legal and regulatory reform intended to cater for Basel II/III project implementation.
- Other changes include:
  - (i) Banking Law amendments and its implementing regulations (especially regulation on general provisioning);
  - (ii) completion of the draft new Deposit Insurance Law;
  - (iii) amendment of the Insurance Law and its regulations; and
  - (iv) completion of the legal and regulatory framework for pensions.

### Program issues, QACs, and indicative targets
- Table 1 contains new end-June 2014 and end-December 2014 QACs for the second and third reviews under the PSI and new indicative targets for end-June and end-December 2014; QACs amended to reflect changes to the adjusters and are consistent with IMF staff understandings on the macroeconomic framework.
- To avoid recurrence of non-observance of the NCB ceiling, the government will strengthen communication of borrowing plans between parastatals and the Ministry of Finance, and between the government and the IMF to improve program design.
- Assessment of the end-December 2014 targets is expected to be completed by end-June 2015, at the time of the third review.
- A new structural benchmark is proposed: publication of quarterly reports of budget execution against annual fiscal objectives.

### Key quantitative figures from Table 1 (selected, preserved exactly)
- Net foreign assets of the NBR at program exchange rate (floor on stock):
  - Dec. 2013 Actual: 511.7
  - Dec. 2013 Prog: 541.0
  - Dec. 2013 Adj. Prog: 597.7
  - Difference: 56.7
  - Status: Met
  - June 2014 Prog: 459.0
  - June 2014 Adj. Prog: 519.7
  - June 2014 Assessment: 516.3
- Reserve money (ceiling on stock) (upper bound):
  - Dec. 2013 Actual: 218.0
  - Dec. 2013 Prog: 218.0
  - Dec. 2013 Adj. Prog: 210.8
  - Difference: 7.2
  - Status: Met
  - June 2014 Prog: 231.1
  - June 2014 Adj. Prog: 229.3
  - June 2014 Assessment: 242.7
- Net domestic financing (ceiling on flow):
  - Dec. 2013 Actual: 22.2
  - Dec. 2013 Prog: -7.1
  - Dec. 2013 Adj. Prog: -84.5
  - Difference: 106.7
  - Status: Met
  - June 2014 Prog: 86.7
  - June 2014 Adj. Prog: 162.8
  - June 2014 Assessment: 152.9
- New nonconcessional external debt contracted or guaranteed by the public sector (US$ millions) (ceiling on stock):
  - Dec. 2013 Actual: 0.0
  - Dec. 2013 Prog: 0.0
  - Dec. 2013 Adj. Prog: 18.2
  - Difference: 18.2
  - Status: Not Met
  - June 2014 Prog: 0.0
  - June 2014 Adj. Prog: 250.0
  - June 2014 Assessment: 250.0
- Domestic revenue collection (floor on flow):
  - Dec. 2013 Actual: 787.1
  - Dec. 2013 Prog: 787.1
  - Dec. 2013 Adj. Prog: 799.0
  - Difference: 11.9
  - Status: Met
  - June 2014 Prog: 466.4
  - June 2014 Adj. Prog: 415.4
  - June 2014 Assessment: 882
- Consolidated domestic debt of public sector (ceiling on stock, eop):
  - Dec. 2013 Actual: 337.3
  - Dec. 2013 Prog: 308.0
  - Dec. 2013 Adj. Prog: 312.2
  - Difference: 4.2
  - Status: Not Met
  - June 2014 Prog: 337.6
  - June 2014 Adj. Prog: 371.8
  - June 2014 Assessment: 363.5
- Total priority spending (floor on flow):
  - Dec. 2013 Actual: 587.1
  - Dec. 2013 Prog: 587.1
  - Dec. 2013 Adj. Prog: 595.3
  - Difference: 8.2
  - Status: Met
  - June 2014 Prog: 357.1
  - June 2014 Adj. Prog: 349.1
  - June 2014 Assessment: 683.5
- Memorandum items:
  - Total budget support (US$ millions): Dec. 2013 Actual: 487.8; Dec. 2013 Prog: 483.0; Dec. 2013 Adj. Prog: -4.8
  - Budget support grants (US$ millions): Dec. 2013 Actual: 473.6; Dec. 2013 Prog: 468.8; Dec. 2013 Adj. Prog: -4.8
  - Euro bond (US$ millions): 400.0 (Dec. 2013 Actual, Prog, Adj. Prog)
  - Unused euro bond proceeds (US$ millions): Dec. 2013 Actual: 121.2; Dec. 2013 Prog: 172.4; Dec. 2013 Adj. Prog: 51.2

### Status of Structural Benchmarks for PSI (selected)
- Revenue Mobilization measures and target dates:
  - Prepare tax expenditure budget covering main tax expenditures. Annually, starting end-June 2014. Rationale: To enhance revenue mobilization.
  - Revise exemption and zero-rating schedules under the VAT-law. End-June 2014. Rationale: To enhance revenue mobilization.
  - Implement plan for better enforcement of tax payer compliance. End-June 2014. Rationale: To enhance revenue mobilization.
  - Revise legislation on the taxation of property. End-Dec 2014. Rationale: To enhance revenue mobilization.
  - Prepare legislative proposal for new tax regime for agriculture. End-Dec 2014. Rationale: To enhance revenue mobilization.
  - Prepare legislative proposal for new tax regime for mining. End-Dec 2014. Rationale: To enhance revenue mobilization.
- Public Financial Management:
  - Pilot the extension of IFMIS to 20 development projects. End-June 2014. Rationale: To strengthen budget execution and controls.
  - Review the block grant formula on the basis of the Local Government Revenue Potential Study. End-Sep 2014. Rationale: To enhance collection of districts own revenues.
  - Sub-national entities (416) to produce monthly, quarterly, and annual financial reports using a uniform template. End-Dec. 2015. Rationale: To improve comprehensiveness and transparency of intergovernmental fiscal transfers.
  - MINECOFIN to publish (and put on its website) quarterly reports of budget execution against annual fiscal policy objectives, within 45 days of end of each quarter. Continuous, starting mid-May 2014. Rationale: To improve fiscal transparency. (New - Proposed)
- Monetary and Exchange Rate Policy (status noted where provided):
  - Issue Treasury bills with maturities of six months and longer as a monetary policy instrument to absorb longer-term liquidity. End-Dec 2013. Status: Met.
  - Start publishing money market rates (interbank, repo, and T-bill) for different maturities bi-weekly. End-Dec 2013. Status: Met.
  - Prepare plan, based on MCM TA recommendations and NBR assessment, for strengthening monetary and exchange rate operations. End-March 2014. Status: Met.
  - Start publishing quarterly inflation reports. End-March 2014. Status: Met.
  - Use Treasury bills (or other tradable securities) as the underlying collateral in liquidity absorbing repos. End-June 2014. Rationale: To develop money market instruments.
- Financial Sector Development:
  - Design a deposit guarantee scheme. End-June 2014. Rationale: To increase confidence in banking system.
- Statistics:
  - NBR to gather high frequency data and undertake economic sentiment surveys. End-2013. Status: Met.

### Technical Memorandum of Understanding (TMU) highlights
- TMU defines quantitative targets for the MEFP period December 2, 2013–November 30, 2016; supersedes TMU in Country Report No. 13/372.
- Quantitative program assessed through Assessment Criteria (AC) and Indicative Targets (IT).
- AC apply to: floor on stock of net foreign assets (NFA) of NBR; ceiling on stock of reserve money; ceiling on flow of net domestic financing (NDF) of central government; ceiling on contracting or guaranteeing of new non-concessional external debt by public sector; ceiling on stock of external payment arrears of public sector.
- IT apply to: floor on flow of domestic revenue collection of central government; ceiling on flow of net accumulation of domestic arrears; ceiling on stock of consolidated domestic debt of the public sector; floor on flow of priority spending.
- Assessment criteria on contracting or guaranteeing new non-concessional external debt and stock of external payment arrears are applicable on a continuous basis.
- Program exchange rates for accounting purposes (end-December 2013 rates, apply for 2014):
  - Rwanda Franc (per US$) 670.1
  - Euro 1.3791
  - British Pound 1.6375
  - Japanese Yen (per US$) 103.4116
  - SDR 1.5383
- Definitions and reporting requirements summarized for:
  - Net domestic financing (NDF) of the government: change in sum of (i) net banking sector credit to the government and (ii) non-bank holdings of government domestic debt.
  - Adjusters to NDF include amount of any shortfall between actual and programmed budgetary loans and grants (up to a maximum of US$80 million), unused proceeds of the US$400 million euro bond relative to US$107.3 million thresholds, and expenditure for food imports in case of a food emergency.
  - Reporting: monthly transmission of data on NDF, domestic revenues, and priority expenditure within five weeks from end of each month.

*Source: Rwandan authorities and IMF staff estimates and projections (excerpt from the IMF Country Report/TMU material provided).*

### 19. A ceiling applies to net accumulation of domestic arrears of the government.

### 19. A ceiling applies to net accumulation of domestic arrears of the government.

### Ceilings and measurement
- The ceilings for June 30, 2014 and December 31, 2014 are cumulatively measured from December 31, 2013.
- A negative target thus represents a floor on net repayment.

### Definition of net accumulation of arrears
- Net accumulation of arrears = gross accumulation of new domestic arrears − gross repayment of any arrears outstanding since the beginning of the year under review.
- Gross accumulation of new domestic arrears is measured as the difference between payment orders and actual payments related to payment orders issued.
- Gross repayment includes repayment of float during the review year and the repayment of older arrears.

### Reporting requirement for domestic arrears
- 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.

### Limits on external debt — overview
- A ceiling applies to contracting and guaranteeing by the public sector of new non-concessional borrowing with non-residents.
- The ceiling 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 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 therefore 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 criteria including: (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
- 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.

### Definition of concessionality
- A debt is concessional if it includes a grant element of at least 35 percent.
- Grant element = (PV of debt subtracted from nominal value) expressed as a percentage of the nominal value.
- PV of debt at contracting is calculated by discounting the future stream of payments of debt service due on this debt using a discount rate of 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 Guidelines on Performance Criteria with Respect to External Debt, Point 9)
- 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, requiring future payments in assets or services to discharge principal and/or interest.
- Primary forms include:
  - (i) loans (including deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, and official swap arrangements),
  - (ii) suppliers' credits,
  - (iii) leases (debt = present value at inception of all lease payments expected during the agreement, excluding payments for operation, repair, or maintenance).
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are included.
- Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- The definition also applies to commitments contracted or guaranteed for which value has not been received.

### Limit on external payment arrears (assessment criterion)
- 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 exclude arrears on obligations that are subject to rescheduling.

### Consolidated domestic debt of the public sector (IT)
- Domestic debt (DD) for program purposes 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, and to private debt for which official guarantees have been extended implicitly or explicitly.
- The authorities will inform Fund staff of any changes in debt position of public sector entities.

### Adjusters to the DD ceiling
- In case of a shortfall in programmed budgetary loans and grants (per paragraph 11), the ceiling on consolidated domestic debt of public sector will be adjusted upward by the same amount as the increase in the ceiling in the NDF, but capped per paragraph 11.
- The ceiling on the DD will be adjusted upward by the amount of expenditure for food imports in the case of a food emergency.

### Reporting requirement for domestic debt
- Data on domestic debt of the public sector, including treasury bills issued by the NBR for monetary policy purposes, will be transmitted on a monthly basis within five weeks of the end of each month.

### Targets for monetary aggregates — Net foreign assets (NFA) of the NBR (AC)
- A floor applies to the NFA of the NBR for June 30, 2014 and for December 31, 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; such assets include, but are not limited to, reserve assets used as collateral or guarantee for third party external liabilities.
- 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 to 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/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/is lower than US$107.3 million by end-June 2014 and not zero by end December 2014.
- 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 for NFA
- 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.
- The 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 June 30, 2014 and December 31, 2014 as indicated in Table 1. The ceiling is the upper bound of a reserve money band (set at+/- 2 percent) around a central reserve money target.
- 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.
- Reserve money is defined as the sum of currency in circulation, commercial banks’ reserves, and other nonbank deposits at the NBR.

### Adjuster for reserve money
- The ceiling on the stock of reserve money will be adjusted symmetrically for a change in the required reserve ratio of commercial banks. The adjustor will be calculated as (new reserve ratio minus program baseline reserve ratio) multiplied by actual amount of liabilities (Rwanda Franc plus foreign-currency denominated) in commercial banks.

### Reporting requirement for reserve money
- Data on reserve money will be transmitted on a weekly basis within seven days of the end of each week. 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 communication
- 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 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.
- The authorities will on a regular basis submit information to IMF staff with the frequency and submission time lag as indicated in TMU Table 1. The information should be mailed electronically to the Fund (email: afrrwa@imf.org).

*Source: _cr14185 - 19. A ceiling applies to net accumulation of domestic arrears of the government.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14185.pdf_