## 1. Stylized ‘No Adjustment’ Baseline Outlook for the Balance of Payments (_cr16153)

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---

### Recent developments and macroeconomic context
- Real GDP grew by an estimated 6.9 percent in 2015.
- Headline inflation (y/y) rose to 4.5 percent by end-December and remained through Q1 2016.
- Rwanda hosted around 75,000 Burundian refugees affecting food demand and prices.
- Private sector credit grew by 26.8 percent in 2015 (compared to 19.6 percent in 2014); in March Q1 2016 private sector credit growth slowed to 17.8 percent y/y.
- Broad money and private sector credit grew more than expected in 2015 despite reserve money targets being met.
- Overall fiscal deficit amounted to 5.4 percent of (revised) GDP in 2015.
- Domestically-financed public investment spending: 7.9 percent of GDP; current expenditure: 14.6 percent of GDP.
- Mineral exports (28 percent of total exports in 2014) dropped by 40 percent in 2015.
- Current account balance worsened from a deficit of 16.4 percent in 2014 to 18.1 percent in 2015.
- Official reserves at end-March were US$817 million, or 3.4 months of imports; commercial banks’ reserves dropped another US$46 million since the beginning of the year.
- Rwandan franc depreciated 7.5 percent against the US$ in 2015 and dropped 3.4 percent against the US$ through end-April 2016 (11 percent on an annual basis).

### PSI program performance (selected)
- All but one quantitative target met; most structural benchmarks met.
- Indicative ceiling on net domestic financing breached by a minor amount due to slightly larger reduction in domestic arrears.
- Of three structural benchmarks due end-May 2016, two met; quarterly budget execution report for end-December produced and published one month late (April 1, 2016).
- Structural measures for end-June 2016 on track; study on a new tax regime for agriculture reprogrammed.

### Stylized “No Adjustment” baseline — assumptions and selected projected dynamics
- Main drivers of deterioration:
  - Mineral exports (tin, tantalite, tungsten) hit by lower prices and increased production costs (origin tagging and auditing raised production costs by around 20 percent).
  - Private remittances slowed significantly; outlook for other private capital inflows darkened.
- Method:
  - Staff constructed a “shock no-adjustment” baseline using April 2016 WEO projections, holding growth and imports at recent historical levels; compared to a “no-shock” scenario proxied by the 3rd PSI review.
  - Positive fuel price shock offset about 2/3 of the shock in 2015 and expected to offset about the same in 2016-17.
  - Under the hypothetical scenario, higher growth and imports are financed by use of official foreign reserves, nearly depleting stocks by end-2017.

- Selected numerical results (comparative table, 2015-2017; values preserved as in source):
  - Real GDP growth, %: No shock proxied by 3rd PSI review: 6.5; Estimated: 6.9; No shock (adjustment column): 7.0; Shock w/no adjustment: 7.0; No shock (other column): 7.5; Shock w/no adjustment other: 7.5
  - Current account balance: -947, -1,096, -957, -1,459, -1,324, -1,248, -574
  - Trade balance: -1,290, -1,232, -1,324, -1,599, -1,513, -1,500, -205
  - Exports of goods: 742, 683, 830, 668, 924, 713, -431
    - of which: Minerals: 211, 118, 248, 95, 281, 101, -426
  - Imports of goods: 3, 2,031, 1,916, 2,154, 2,267, 2,437, 2,213, -226
    - of which: energy imports: 4, 256, 226, 309, 201, 353, 237, -255
    - of which: Rwandair: 0, 0, 0, 188, 188, 0, 0
  - Services (net): -45, -193, 0, -203, -152, -75, -275
    - of which: KCC and Rwandair: 0, -112, 0, -139, 0, 0, -250
  - Private transfers: 194, 152, 186, 168, 204, 178, -86
  - Capital/Financial balance: 808, 1,094, 1,229, 1,202, 1,323, 873, -191
    - of which: KCC-and Rwandair: 68, 134, 282, 7200, 310
    - of which: Other private inflows: -115, 983, 213, 524, 311, 0, -206
  - Overall balance: -139, -612, 72, -257, -1,376, -824
  - Gross official reserves (US$): 880, 920, 1,149, 661, 1,146, 283, -863
    - In months of imports: 3.7, 3.6, 4.0, 2.6, 4.1, 1.1

### Policy discussions to address external imbalances
- Authorities accelerated export promotion programs and introduced import substitution measures; staff agreed these would take time to have impact.
- Staff emphasized additional short-term policy adjustment to reduce import demand more rapidly, acknowledging short-term growth costs but noting potential to avoid larger later adjustments.
- Authorities considered temporary balance of payments support important as a buffer during adjustment.

### Medium-term measures to reverse external imbalances (Box 2 highlights)
- Export promotion and export-base expansion measures:
  - Export advisors, a trade information center, and an Export Growth Facility (EGF) providing: (1) an investment catalyst fund; (2) a matching grant fund for medium-sized exporters; and (3) a short-term export guarantee facility.
- Focus areas: services exports (MICE strategy), value addition in commodities, agricultural processed products, and textiles.
  - Coffee: 10 percent increase (to 50 percent) in the share of pre-washed coffee bean exports.
  - Services: large increase in planned conferences in Kigali in 2016; up to 2,800 new executive level hotel rooms poised to open in 2016.
- Import substitution priorities (account for more than 10 percent of current import bill): rice, sugar, cement and clothing.
  - Rice: expanding acreage by 8,000 hectares with objective of self-sufficiency by 2018.
  - Cement: plans to increase national cement company production six-fold.
  - Sugar: seeking a new investor and offering land for sugar cane plantations.
  - Clothing: ban on used clothing imports (in concert with the EAC).
- Trade-cost reduction efforts: Northern Corridor initiative and reinvigorated Central Corridor discussions with Tanzania.

### Policy mix and exchange rate stance
- Exchange rate flexibility will serve as the principal adjustment tool, supported by tightened fiscal and monetary policy.
- Staff’s external sector analysis indicates that as of end-2015 the exchange rate was likely modestly overvalued; additional exchange rate adjustment warranted while BOP pressures persist.

---

### Fiscal framework, public investment, and revenue measures

### Fiscal consolidation and public investment
- Fiscal deficit target reduced relative to the 4th PSI review: additional adjustment of 0.6 and 1.1 percentage points of (revised) GDP in FY16/17 and FY17/18, respectively.
- Authorities rely increasingly on PPPs to continue scaling up public investment while meeting deficit target (energy generation, IT infrastructure, transportation).
- Plan to include more fiscal risk analysis in public investment planning to safeguard against fiscal risks.

### Key fiscal figures (revised GDP comparisons; columns correspond to 2015/16, 2016/17, 2017/18 and 4th PSI Review projections — values preserved)
- Tax and non-tax revenue: 1,104; 1,104; 1,271; 1,237; 1,435; 1,374
  - % GDP: 18.0; 18.0; 18.7; 18.; 18.9; 18.1
  - Of which: PKO: 71; 71; 119; 80; 129; 86
    - % GDP: 1.2; 1.2; 1.7; 1.; 1.7; 1.1
- Grants: 375; 375; 328; 365; 333; 371
  - % GDP: 6.1; 6.1; 4.8; 5.; 4.4; 4.9
- Total exp. and net lending: 1,785; 1,785; 1,888; 1,849; 2,084; 1,983
  - % GDP: 29.0; 29.0; 27.7; 27.1; 27.4; 26.1
- Current expenditure: 900; 900; 1,009; 990; 1,122; 1,069
  - % GDP: 14.6; 14.6; 14.8; 14.5; 14.8; 14.1
  - Goods & services component: 180; 180; 187; 201; 212; 215
    - % GDP: 2.9; 2.9; 2.7; 3.; 2.8; 2.8
- Capital expenditure: 776; 776; 768; 751; 835; 796
  - % GDP: 12.6; 12.6; 11.3; 11.; 11.; 10.5
- Overall deficit (incl. grants): -306; -306; -289; -247; -316; -238
  - % GDP: -5.0; -5.0; -4.2; -3.6; -4.2; -3.1
- Memo: "pure" dom. spending1: 1,327; 1,327; 1,371; 1,333; 1,516; 1,462
  - % GDP: 21.6; 21.6; 20.1; 19.6; 20.; 19.2
- GDP: 6,148; 6,148; 6,811; 6,811; 7,597; 7,597

Note: 1 Excludes PKO, "global fund" grants tied across categories, and ext.-fin. cap. exp.

### Revenue measures and tax administration (Box 3 highlights)
- Tax revenue increased from 11.8 percent in FY09/10 to a projected 15.9 percent of GDP in FY15/16.
- Framework assumes tax revenues stay roughly constant through FY17/18 given measurement uncertainty and probable decline in trade taxes.
- Selected tax policy measures implemented:
  - December 2013: increased excise tax on mobile airtime; introduced royalty tax on mining.
  - FY2015/16 budget: road fund levy; excise tax on petroleum; higher excise tax on tobacco; import tax on non-EAC products; increased local government fees.
- Tax administration measures:
  - EBMs introduced to improve VAT collection; expansion planned in 2016.
  - Revised investment code replaced blanket exemptions with targeted exemptions and revised schedules for exemptions and zero-VAT rating.
  - Transition of real estate tax collection to Fixed Asset Tax delayed; unlikely to yield revenues before late in FY17/18.

---

### Monetary policy, financial sector, and liquidity management

### Monetary policy stance and instruments
- Tighter reserve money targets adopted for 2016 and 2017 relative to 4th review.
- Private sector credit growth expected to decline from close to 27 percent in 2015 to 16 percent in 2016, with a significant impact on private sector import demand.
- Authorities plan to issue new central bank bonds to mop up excess reserves and strengthen transmission from policy to money market rates.
- Move toward more indirect monetary policy tools to align with EAC convergence plans and reduce liquidity overhangs.

### Market development and regulatory reforms
- Measures to develop interbank and secondary markets: extend yield curve, strengthen secondary markets for government securities, define an optimal range of excess reserves, introduce repurchasing operations between banks, identify a policy interest rate consistent with excess reserves.
- Regulatory initiatives:
  - Laws to improve central bank oversight over banks and non-banks.
  - Law to allow establishment of private pensions.
  - Basel II and III implementation project underway.
  - Revised deposit insurance law to extend protection to smaller depositors.
  - Central bank reviewing microfinance sector legal/regulatory framework with World Bank support.

### Financial soundness (selected indicators)
- NPLs/gross loans around 6.7 down to 6.2 percent in observed quarters.
- Return on average assets around 2.3–1.9 percent; return on average equity around 11.9–12.1 percent.
- Liquid assets/total deposits between 46.3 and 54.2 percent across periods.
- Broad money (M3) year-on-year growth: 19.0; 21.1; 13.1; 14.7; 15.4; 13.7; 16.1; 15.6; 15.1 (series).
- Credit to non-government sector growth: 19.6; 26.8; 14.0; 14.9; 16.0; 22.4; 15.0; 16.0; 19.5 (series).

---

### External outlook, reserves, and adjustment impacts

### Medium-term external adjustment impact projections
- Combined adjustment policies expected to reduce import demand significantly:
  - Projected reduction in import demand: cumulative US$330 million in 2016-2017, after an estimated US$60 million in 2015.
- Growth impact:
  - Projected slowdown from potential 7.0-7.5 percent to about 6.0 percent over the two years, with downside risks.
- Current account projections:
  - 2016: current account balance projected to worsen to 16.5 percent of GDP.
  - 2017: improve to 12 percent of GDP.
  - 2018: improve to 10 percent of GDP.
- Reserves:
  - Gross reserves projected to be roughly 2.5 months of (reduced) prospective imports as of end-2017.

### External sector assessment (Annex I) — key conclusions and metrics
- External position in 2015 weaker than level consistent with medium-term fundamentals and desirable policies.
- Current account deficit: 13.5 percent of GDP in 2015 (12.2 percent in 2014).
- EBA-lite CA norm: -6.1 percent of GDP (2015); CA gap: -7.4 percent of GDP (2015).
- Staff-assessed REER: likely modestly overvalued as of end-2015.
- Gross public and publicly guaranteed external debt: 28.5 percent of GDP in 2015 (23.6 percent in 2014); about 75 percent concessional multilateral and bilateral.
- Total gross external liabilities: [45] percent of GDP at end-2015; direct investments about [16] percent.
- Gross reserves: 3.6 months of prospective imports in 2015 (4.2 months in 2014); staff views optimal range: 4-5 months of prospective imports.

### Reserve adequacy and policy recommendation
- Staff recommends rebuilding foreign reserve buffers to more comfortable levels, supported by IMF financing under the Standby Credit Facility.
- Short-term policy response: tighter fiscal and monetary policies and greater exchange rate flexibility.
- Medium-term policy response: diversify and expand exports, lower costs of doing business, remove structural impediments to private sector growth.

---

### Program financing request, SCF arrangement, and program architecture

### SCF request and access
- Authorities request access of 90 percent of quota (SDR 144.18 million) under an eighteen month SCF arrangement.
- Combined with adjustment policies and other potential financing (not yet approved), reserves would be about 3.8 months of imports in 2016 and 2017.
- IMF’s contribution: slightly less than one-third of the overall package; IMF’s share of overall external financing over 2016-17 would comprise 14 percent.

### SCF arrangement modalities (as presented)
- Duration: expected to mirror program period June 8, 2016-December 8, 2017 (18 months).
- Disbursements (phased):
  - 45 percent of quota upon Board approval (SDR72.09 million).
  - 22.5 percent of quota at completion of 1st review (SDR36.05 million).
  - Remainder split between 2nd and 3rd SCF reviews; reviews expected December 2016, June 2017 and November 2017.
- DSA: updated joint IMF-World Bank DSA suggests current debt risk rating of “low” would be maintained.
- Capacity to repay: Rwanda’s obligations to the Fund stood at SDR 3.27 million as of end-March 2016 (2.0 percent of quota).
- Safeguards: safeguards assessment mission tentatively scheduled for July 2016, with an update prior to the 1st review.

### Proposed program adjustments and conditionality changes
- Authorities request extension of PSI from November 2016 to end-December 2017 and combination of PSI reviews with SCF reviews.
- Proposed changes:
  - Eliminate the indicative ceiling on public-sector domestic debt.
  - Modify the definition for indicative target on domestic arrears accrual.
  - Streamline program adjusters; apply changes for June 2016 test date.
  - Minor revisions to end-June quantitative program targets for reserve money; other quantitative targets unchanged.

### SCF disbursement schedule (Table 8 values preserved)
- June 8, 2016: 72.0900 percent of quota; 101.51 Million SDR; 45.00 Million US$; Condition: Board approval of the SCF arrangement.
- December 1, 2016: 36.0450 percent of quota; 50.76 Million SDR; 22.50 Million US$; Condition: Board completion of the first SCF review based on compliance with end-June 2016 conditionality.
- June 9, 2017: 18.0225 percent of quota; 25.38 Million SDR; 11.25 Million US$; Condition: Board completion of the second SCF review based on compliance with end-December 2016 conditionality.
- November 15, 2017: 18.0225 percent of quota; 25.38 Million SDR; 11.25 Million US$; Condition: Board completion of the third SCF review based on compliance with end-June 2017 conditionality.
- Total: 144.1800 percent of quota; 203.03 Million SDR; 90.00 Million US$.
- Note: Rwanda's quota is SDR 160.2 million.

---

### Program risks, monitoring, and technical assistance

### Main risks to the program
- Downside shocks to commodity prices and private foreign financing flows.
- Higher oil prices.
- Political and weather risks: security crisis in Burundi increasing refugees and spending needs; drought causing hydropower shortfalls and food price inflation.
- Refugees exert pressure on food and import demand and inflation.
- Risk that export diversification, value-add promotion, and import substitution plans underperform.

### Monitoring, reporting, and program data requirements
- TMU defines QAC/PC and IT for test dates June 30, 2016 and December 31, 2016.
- Key QAC/PC include: floor on NFA of the NBR; ceiling on stock of reserve money; ceiling on overall deficit (commitment basis); continuous ceiling on external payment arrears.
- Reporting frequencies: weekly data within seven days; monthly within five weeks; quarterly within eight weeks; annual as available. (Detailed TMU reporting schedule preserved in source.)

### Technical assistance priorities and capacity building
- Priority TA areas identified:
  - Improving coverage, comprehensiveness and timeliness of fiscal data reporting.
  - Enhancing capacity in financial programming.
  - Deepening monetary markets (foreign exchange and domestic currency).
  - Reconciling supply-side and expenditure-side national accounts data and including household survey results.
  - Carrying out revenue administration reforms identified in the TADAT.
- Authorities request TA paced and sequenced for absorption and capacity building.

---

### Debt sustainability, DSA conclusions, and main vulnerabilities

### DSA headline findings
- Rwanda assessed to have a low risk of external debt distress (baseline and standard stress tests).
- Public sector debt (end-2015): total public sector debt 35.4 percent of GDP; external debt 28.5 percent of GDP; domestic debt 6.9 percent of GDP.
- Under baseline, debt burden indicators projected to remain below policy-dependent thresholds.
- Standard stress tests show temporary breaches of debt service-to-exports and debt service-to-revenue ratios in 2023 when the Eurobond issued in 2013 matures; breaches are temporary and low risk assessment maintained assuming ability to refinance.

### Main risk to debt sustainability
- The narrow export base is the main risk; recent sharp decline in mineral exports highlights vulnerability. If export diversification fails to materialize, longer-term debt sustainability risks would rise.

### Selected DSA indicators and projections (values preserved)
- Current account, incl. official transfers (percent of GDP): -7.4; -10.5; -13.5; -16.5; -12.0; -10.2; -11.1; -11.1; -11.0; -9.3; -9.0; -9.3; -9.5 (series).
- Exports of goods and services (percent of GDP): 15.6; 16.9; 17.3; 16.7; 17.6; 18.4; 18.7; 18.9; 20.4; 20.4; 20.4; 20.4; 20.4 (series).
- Imports of goods and services (percent of GDP): 32.5; 33.5; 34.9; 37.3; 33.3; 32.2; 31.9; 32.1; 32.3; 32.3; 32.3; 32.3; 32.3 (series).
- Baseline PV of debt-to-GDP ratio: 25 (2016); 27 (2017); 28 (2018); 28 (2019); 27 (2020); 26 (2021); 21 (2026); 15 (2036).
- Sensitivity: One-time 30 percent nominal depreciation in 2017 (Bound test B6) causes PV of debt-to-GDP to rise substantially (e.g., to 37, 39, 39, 39 in panel entries).

---

### Staff appraisal and recommendations (summary)
- Rwanda’s policy performance sustained; program performance through end-December remained strong despite the shock.
- Authorities intensified policy response: exchange rate adjustment, export diversification, import substitution, and tightening fiscal and monetary stances to reduce import demand and preserve reserves.
- The requested SCF financing should provide an appropriate reserve buffer to bolster confidence while policy implementation proceeds.
- Staff recommends approval of:
  - the authorities’ request for a new SCF arrangement;
  - a modification of the QAC establishing a ceiling for reserve money for end-June 2016;
  - approval of the authorities’ request for an extension of the PSI; and
  - completion of the fifth PSI review.
- Authorities should be ready to tighten fiscal and monetary policy further if needed and monitor external developments frequently.

*Source: IMF staff report chapter titled "1. Stylized ‘No Adjustment’ Baseline Outlook for the Balance of Payments" and related sections in content unit "_cr16153".*

### 1. Stylized ‘No Adjustment’ Baseline Outlook for the Balance of Payments ________________________6

### 1. Stylized ‘No Adjustment’ Baseline Outlook for the Balance of Payments

### Recent developments and macroeconomic context
- Real GDP grew by an estimated 6.9 percent in 2015.
- Headline inflation (y/y) rose to 4.5 percent by end-December, where it remained through Q1 2016.
- Rwanda hosted around 75,000 Burundian refugees affecting food demand and prices.
- Private sector credit grew by 26.8 percent in 2015 (compared to 19.6 percent in 2014), largely driven by lending for hotels.
- In Q1 2016, private sector credit growth slowed to 17.8 percent y/y in March.
- Broad money and private sector credit grew more than expected in 2015 despite reserve money targets being met.
- The overall fiscal deficit amounted to 5.4 percent of (revised) GDP in 2015.
- Domestically-financed public investment spending remained elevated at 7.9 percent of GDP; current expenditure was contained at 14.6 percent of GDP.
- Mineral exports, which accounted for 28 percent of total exports in 2014, dropped by 40 percent in 2015.
- The current account balance worsened from a deficit of 16.4 percent in 2014 to 18.1 percent in 2015.
- Official reserves at end-March were US$817 million, or 3.4 months of imports; commercial banks’ reserves dropped another US$46 million since the beginning of the year.
- The Rwandan franc depreciated 7.5 percent against the US$ in 2015 and dropped 3.4 percent against the US$ through end-April 2016 (11 percent on an annual basis).

### PSI program performance
- All but one quantitative target was met; most structural benchmarks were met.
- The indicative ceiling on net domestic financing was breached by a minor amount, reflecting a slightly larger reduction than planned in domestic arrears.
- Of three structural benchmarks to be implemented through end-May 2016, two were met; the quarterly report on budget execution for end-December was produced and published one month late (April 1, 2016).
- Structural measures for end-June 2016 were on track; a study on a new tax regime for agriculture (due end-November) was reprogrammed because a technical expert had not yet been identified.

### Stylized “No Adjustment” baseline: assumptions and projected dynamics (Box 1)
- Main drivers of deterioration:
  - Mineral exports concentrated in tin, tantalite and tungsten were hit by both lower international prices and increased production costs (origin tagging and auditing) that raised production costs by around 20 percent.
  - Private remittances slowed significantly; outlook for other private capital inflows darkened.
- Staff constructed a “shock no-adjustment” baseline using April 2016 WEO projections, maintaining growth and imports at recent historical levels, and compared it to a “no-shock” scenario proxied by the 3rd PSI review.
- The “positive shock” of fuel prices offset about 2/3 of the shock in 2015 and was expected to offset about the same amount in 2016-17.
- Additional assumptions and notes:
  - Private remittances are expected to grow more in line with growth forecasts in source countries.
  - Private capital projects are reduced substantially, reflecting recent historical trends and global/regional developments.
  - The 2015 outcome reflects a large drawdown of commercial bank forex reserves.
  - Rwandair and KCC imports and related financing were added into the baseline with no negative net effect on the BOP.
  - Under this hypothetical scenario, higher growth and imports are financed by use of official foreign reserves, nearly depleting stocks by end-2017.

- Selected numerical results from the Box 1 comparative table (2015-2017):
  - Real GDP growth, %: No shock proxied by 3rd PSI review: 6.5; Estimated: 6.9; No shock (adjustment column): 7.0; Shock w/no adjustment: 7.0; No shock (other column): 7.5; Shock w/no adjustment other: 7.5
  - Current account balance: -947, -1,096, -957, -1,459, -1,324, -1,248, -574
  - Trade balance: -1,290, -1,232, -1,324, -1,599, -1,513, -1,500, -205
  - Exports of goods: 742, 683, 830, 668, 924, 713, -431
    - of which: Minerals: 211, 118, 248, 95, 281, 101, -426
  - Imports of goods: 3, 2,031, 1,916, 2,154, 2,267, 2,437, 2,213, -226
    - of which: energy imports: 4, 256, 226, 309, 201, 353, 237, -255
    - of which: Rwandair: 0, 0, 0, 188, 188, 0, 0
  - Services (net): -45, -193, 0, -203, -152, -75, -275
    - of which: KCC and Rwandair: 0, -112, 0, -139, 0, 0, -250
  - Private transfers: 194, 152, 186, 168, 204, 178, -86
  - Capital/Financial balance: 808, 1,094, 1,229, 1,202, 1,323, 873, -191
    - of which: KCC-and Rwandair: 68, 134, 282, 7200, 310
    - of which: Other private inflows: -115, 983, 213, 524, 311, 0, -206
  - Overall balance: -139, -612, 72, -257, -1,376, -824
  - Gross official reserves (US$): 880, 920, 1,149, 661, 1,146, 283, -863
    - In months of imports: 3.7, 3.6, 4.0, 2.6, 4.1, 1.1
- Notes in table:
  - 1 Proxied by 3rd PSI review.
  - 2 The difference of roughly US$40 million in summing to the overall balance, above and below the line, are due to 2015 errors and omissions.
  - 3 US$200 million in imports were moved from 2017 into 2016 for Rwandair purchases.
  - 4 Petroleum accounts for approximately 95% of energy imports.

### Policy discussions and measures to address external imbalances
- Authorities accelerated export promotion programs and introduced import substitution measures; staff agreed these would have an impact but would take time.
- Staff emphasized additional short-term policy adjustment would be needed to reduce import demand more rapidly, acknowledging short-term growth costs but noting potential to avoid larger later adjustments.
- Authorities considered temporary balance of payments support important as a buffer during adjustment.

### Medium-term measures to reverse external imbalances (Box 2 highlights)
- Export promotion and export-base expansion:
  - Export advisors, a trade information center, and an Export Growth Facility (EGF) providing: (1) an investment catalyst fund; (2) a matching grant fund for medium-sized exporters; and (3) a short-term export guarantee facility.
- Focus areas: services exports (MICE strategy), value addition in commodities, agricultural processed products, and textiles.
  - Coffee: 10 percent increase (to 50 percent) in the share of pre-washed coffee bean exports.
  - Services: large increase in planned conferences in Kigali in 2016 (e.g., World Economic Forum, African Union Summit); up to 2,800 new executive level hotel rooms poised to open in 2016.
- Import substitution priorities include rice, sugar, cement and clothing (account for more than 10 percent of current import bill):
  - Rice: expanding acreage by 8,000 hectares with objective of self-sufficiency by 2018.
  - Cement: plans to increase national cement company production six-fold.
  - Sugar: seeking a new investor and offering land for sugar cane plantations.
  - Clothing: ban on used clothing imports (in concert with the EAC) to support Special Economic Zone suppliers.
- Trade cost reduction efforts through Northern Corridor initiative and reinvigorated Central Corridor discussions with Tanzania.

### Policy mix and exchange rate stance
- Exchange rate flexibility will serve as the principal adjustment tool, supported by tightened fiscal and monetary policy.
- Staff’s external sector analysis (Annex I) indicates that as of end-2015 the exchange rate was likely modestly overvalued; additional exchange rate adjustment warranted while balance of payments pressures persist.

### Fiscal policy adjustments and projections
- Relative to the 4th PSI review, the fiscal deficit target was reduced in FY16/17 and FY17/18 with additional adjustment of 0.6 and 1.1 percentage points of (revised) GDP in FY16/17 and FY17/18, respectively.
- Key fiscal figures (comparison table using revised GDP; columns correspond to 2015/16, 2016/17, 2017/18 and 4th PSI Review projections):
  - Tax and non-tax revenue: 1,104; 1,104; 1,271; 1,237; 1,435; 1,374
    - % GDP: 18.0; 18.0; 18.7; 18.; 18.9; 18.1
    - Of which: PKO: 71; 71; 119; 80; 129; 86
      - % GDP: 1.2; 1.2; 1.7; 1.; 1.7; 1.1
  - Grants: 375; 375; 328; 365; 333; 371
    - % GDP: 6.1; 6.1; 4.8; 5.; 4.4; 4.9
  - Total exp. and net lending: 1,785; 1,785; 1,888; 1,849; 2,084; 1,983
    - % GDP: 29.0; 29.0; 27.7; 27.1; 27.4; 26.1
  - Current expenditure: 900; 900; 1,009; 990; 1,122; 1,069
    - % GDP: 14.6; 14.6; 14.8; 14.5; 14.8; 14.1
      - of which: goods & services: 180; 180; 187; 201; 212; 215
        - % GDP: 2.9; 2.9; 2.7; 3.; 2.8; 2.8
      - of which: PKO: 101; 101; 151; 111; 177; 112
        - % GDP: 1.6; 1.6; 2.2; 1.6; 2.3; 1.5
  - Capital expenditure: 776; 776; 768; 751; 835; 796
    - % GDP: 12.6; 12.6; 11.3; 11.; 11.; 10.5
  - Overall deficit (incl. grants): -306; -306; -289; -247; -316; -238
    - % GDP: -5.0; -5.0; -4.2; -3.6; -4.2; -3.1
  - Memo: "pure" dom. spending1: 1,327; 1,327; 1,371; 1,333; 1,516; 1,462
    - % GDP: 21.6; 21.6; 20.1; 19.6; 20.; 19.2
  - GDP: 6,148; 6,148; 6,811; 6,811; 7,597; 7,597
- Notes:
  - 1 Excludes PKO, "global fund" grants tied across categories, and ext.-fin. cap. exp.
- Fiscal strategy highlights:
  - Adjustment largely achieved through “pure” domestic spending reduction of 2 percentage points of GDP planned for FY16/17 relative to FY15/16.
  - Total revenue reduced by projected reduction in non-tax revenues received for peacekeeping operations and demobilization (PKO), with linked spending adjusted commensurately.
  - Incoming grant projections increased by 0.5 percent of GDP each year based on updated projections from development partners.
  - Overall spending largely unchanged but reallocated: more spending linked to higher external grants and financing, and less spending elsewhere; Global Fund and Gates grants tied to specific programs and spending classified across categories.

*Source: IMF staff report chapter titled "1. Stylized ‘No Adjustment’ Baseline Outlook for the Balance of Payments" (excerpt).*

### 12.      The fiscal deficit will be reduced close to 3 percent of GDP, the convergence target for

### 12.      The fiscal deficit will be reduced close to 3 percent of GDP, the convergence target for

### Fiscal framework and public investment
- The fiscal deficit will be reduced close to 3 percent of GDP, bringing the deficit in line with the EAC convergence criterion, which stipulates bringing the deficit 3.0 percent of GDP by 2021.
- To continue scaling up public investment while meeting the deficit target, the authorities are increasingly relying on public-private partnerships (PPPs), particularly in energy generation, IT infrastructure, and transportation.
- Authorities plan to develop a broad-based strategy to include more fiscal risk analysis in the public investment planning process to safeguard against potential fiscal risks.

### Public financial management and revenue measures
- Additional commitments to strengthen public financial management and revenue collection are included (MEFP, Table 2).
- New administrative and reporting measures:
  - Establish a timeframe to move fiscal reporting to the GFS14 framework to resolve problems with timely production of consolidated fiscal reports.
  - Share a planned detailed report on FY15/16 calculated tax expenditures.
  - Begin a pilot system of tracking donor project spending and financing.
  - Submit revised Fixed Assets Tax legislation—incorporating current work on optimal valuation methodologies—to parliament.
- Objective: Improve fiscal transparency and spending efficiency; expenditure reviews have judged spending efficiency to be quite good already.

Box 3. Revenue Measures — key points and trajectory
- Tax revenue increased from 11.8 percent in FY09/10 to a projected 15.9 percent of GDP in FY15/16, with additional gains expected in the coming years.
- Given measurement uncertainty and probable decline in trade taxes as imports are reduced, the framework assumes tax revenues stay roughly constant through FY17/18.
- New tax policy measures (selected):
  - December 2013: increased excise tax on mobile airtime; introduced royalty tax on mining.
  - FY2015/16 budget: road fund levy; excise tax on petroleum; higher excise tax on tobacco; import tax on non-EAC products; increased local government fees.
- New tax administration measures:
  - Introduced electronic billing machines to improve VAT collection; expansion planned in 2016.
  - Revised investment code replaced blanket tax exemptions with targeted exemptions for priority sectors; revised schedules for exemptions and zero-VAT rating.
  - Reinforced collection of tax arrears and implemented other tax administration measures.
- Measures underway:
  - Transition real estate tax collection from “Land-Lease Fee” to a Fixed Asset Tax based on property values. Passage delayed due to refinement of valuation methodologies; unlikely to yield revenues before late in FY 17/18.

### Monetary policy and financial sector
- Tighter reserve money targets adopted for 2016 and 2017 relative to the 4th review.
- Using more realistic assumptions for velocity and the money multiplier, private sector credit growth is expected to decline from close to 27 percent in 2015 to 16 percent in 2016, with a significant impact on private sector import demand.
- Authorities plan to issue new central bank bonds to mop up excess reserves, strengthen the link between key policy and money market rates, and influence lending rates and volumes.
- Plans to move to more indirect monetary policy tools align with EAC convergence plans; reducing liquidity overhangs should make the monetary policy framework more effective.
- Measures to develop interbank and secondary markets include extending the yield curve, strengthening secondary markets for government securities, defining and targeting an optimal range of excess reserves, introducing repurchasing operations between banks, and identifying a policy interest rate consistent with the excess reserves range.
- Financial sector indicators deteriorated slightly in H2 2015 but the financial system remains broadly sound per sectoral financial soundness indicators.
- Regulatory and supervisory initiatives:
  - Laws to improve central bank oversight over banks and non-banks.
  - Law to allow establishment of private pensions.
  - Project to implement Basel II and III regulatory framework for banks underway.
  - Revised deposit insurance law to extend protection to smaller depositors.
  - Central bank reviewing microfinance sector legal, regulatory and supervisory framework with World Bank support.

### External outlook and adjustment impacts
- Combined adjustment policies are expected to reduce import demand significantly:
  - Projected reduction in import demand: cumulative US$330 million in 2016-2017, after an estimated US$60 million in 2015.
- Growth impact:
  - Projected slowdown from potential 7.0-7.5 percent to about 6.0 percent over the two years, with downside risks.
- Current account projections:
  - 2016: current account balance projected to worsen to 16.5 percent of GDP.
  - 2017: improve to 12 percent of GDP.
  - 2018: improve to 10 percent of GDP.
- Reserves:
  - Gross reserves projected to be roughly 2.5 months of (reduced) prospective imports as of end-2017.
- Statistical and monitoring improvements:
  - Moved to reporting on a BPM6 basis; aim to move to quarterly BOP reporting.
  - Instituted informal surveys to anticipate ex-ante periodic forex needs of the private sector.
  - Intend to include assessment of ongoing foreign exchange needs when considering priority investment projects and PPPs.

### Technical assistance priorities
- Rwanda has a good track record using IMF technical assistance from functional departments and AFRITAC East, focusing on revenue mobilization, public financial management, financial market development, national accounts statistics, fiscal statistics, and monetary and exchange rate management.
- Authorities request TA paced and sequenced for absorption and capacity building.
- Identified priority TA areas:
  - Improving coverage, comprehensiveness and timeliness of fiscal data reporting.
  - Enhancing capacity in financial programming.
  - Deepening monetary markets (foreign exchange and domestic currency).
  - Reconciling supply-side and expenditure-side national accounts data and including household survey results.
  - Carrying out revenue administration reforms identified in the TADAT.

### Request for SCF arrangement and program architecture
- Authorities request access of 90 percent of quota (SDR 144.18 million) under an eighteen month SCF arrangement.
- Combined with adjustment policies and other potential financing (not yet approved), reserves would be about 3.8 months of imports in 2016 and 2017.
- IMF contribution:
  - IMF would contribute slightly less than one-third of the overall package; IMF’s share of overall external financing over 2016-17 would comprise 14 percent.
- SCF arrangement independent aspects:
  - Duration: expected to mirror program period June 8, 2016-December 8, 2017 (18 months).
  - Disbursements: four disbursements phased as follows:
    - 45 percent of quota upon Board approval (SDR72.09 million).
    - 22.5 percent of quota at completion of 1st review (SDR36.05 million).
    - Remainder split between 2nd and 3rd SCF reviews; reviews expected December 2016, June 2017 and November 2017.
  - DSA: updated joint IMF-World Bank DSA suggests current debt risk rating of “low” would be maintained.
  - Capacity to repay: Rwanda’s obligations to the Fund stood at SDR 3.27 million as of end-March 2016 (2.0 percent of quota).
  - Safeguards: a safeguards assessment mission tentatively scheduled for July 2016, with an update prior to the 1st review of the SCF arrangement.

### Program risks, modalities, and conditionality adjustments
- Downside risks to growth and the program:
  - Potential deeper shocks to commodity prices and private foreign financing flows.
  - Higher oil prices.
  - Increased risks from political and weather developments (e.g., security crisis in Burundi could increase refugees and associated spending needs; drought causing hydropower shortfalls and food price inflation).
  - Refugees exert pressure on food and import demand and inflation.
  - Risk that export diversification, value added promotion, and import substitution plans are less successful than expected.
- Program modalities:
  - Authorities request extension of the current PSI-supported program from November 2016 to end-December 2017 to combine PSI reviews with SCF arrangement reviews and retain PSI as the medium-term vehicle with the Fund.
- Conditionality design changes:
  - Proposal to eliminate the indicative ceiling on public-sector domestic debt (redundant with new ceiling on fiscal deficit and retained ceilings on net domestic financing and external borrowing by public enterprises).
  - Proposed modification of the definition for the indicative target on domestic arrears accrual to improve effectiveness.
  - Streamline program adjusters to retain only the most relevant.
  - Proposed application of changes for the June 2016 test date.
- Minor revisions to end-June quantitative program targets for reserve money proposed; all other quantitative targets unchanged with updated assumptions for program exchange rate and budget support disbursements.

### Staff appraisal (summary)
- Rwanda’s strong policy performance sustained; program performance through end-December remained strong despite unfolding shock.
- Authorities intensified policy response as external shocks became evident, moving beyond exchange rate adjustment to promote export diversification and import substitution, and tightening fiscal and monetary stances to reduce import demand and preserve reserves.
- Policies balance short-term adjustment and medium-term growth objectives; authorities recognize trade-offs and the need to act early to avoid more disruptive adjustment later.
- The requested SCF financing should provide an appropriate reserve buffer to bolster confidence while policy implementation proceeds.
- Risks remain on the downside; the exchange rate will remain the main adjustment tool, but authorities should be ready to tighten fiscal and monetary policy further if needed and monitor external developments frequently.

*Source: IMF staff report text in content unit "_cr16153 - 12.      The fiscal deficit will be reduced close to 3 percent of GDP, the convergence target for"*

### 32.      Staff recommends approval of the authorities’ request for a new SCF arrangement, a

### _cr16153 - 32.      Staff recommends approval of the authorities’ request for a new SCF arrangement, a

### Recommendation and Program Actions
- Staff recommends approval of:
  - the authorities’ request for a new SCF arrangement,
  - a modification of the QAC establishing a ceiling for reserve money for end-June 2016,
  - approval of the authorities’ request for an extension of the PSI,
  - completion of the fifth PSI review.

### Recent economic developments and outlook (selected findings)
- Growth and activity:
  - Real GDP growth: reported robust through 2015 (figures and quarterly series shown in charts).
  - Public investment remained strong; composition: foreign-financed and domestically-financed investment.
- External sector pressures:
  - Exports of goods and services declined in 2015, driven by a fall in mineral exports.
  - Trade balance deteriorated (trade deficit series shown).
  - Gross reserves (banking system, US$ millions) and official reserves (months of imports) showed drawdowns.
  - Exchange rate: RWF per U.S.$ series: 647.1, 682.7, 700.6, 754.7 (Mar-13 to Mar-16 points shown).
  - Nominal and real effective exchange rates depreciated versus peers (EAC indices).
- Monetary and price developments:
  - Headline CPI series (period average and end of period) and core inflation trends depicted; inflationary pressures rose in second half of year.
  - Monetary policy remained accommodative through end-2015.
  - Central bank NFA continued to decline as planned; commercial banks’ NFA declined more deeply.
  - Broad money (M3) year-on-year growth: 19.0, 21.1, 13.1, 14.7, 15.4, 13.7, 16.1, 15.6, 15.1 (table series).
  - Credit to non-government sector growth: 19.6, 26.8, 14.0, 14.9, 16.0, 22.4, 15.0, 16.0, 19.5 (table series).

### Fiscal sector and public debt (selected findings)
- Public expenditure:
  - Total expenditure (percent of GDP) high and sustained; capital expenditure significant share.
  - Grants declined in composition; shift to more external borrowing.
- Fiscal balances (Table 1 projections, percent of GDP):
  - Primary balance: -4.2, -4.1, -3.9, -3.9, -3.8, -3.1, -3.6, -2.4, -2.0 (series across columns).
  - Overall balance: -4.9, -5.0, -4.6, -4.8, -4.7, -4.0, -4.6, -3.3, -3.0 (series across columns).
- Public debt:
  - Total public debt (percent of GDP) series: 29.3, 35.4, 35.0, 41.9, 44.5, 37.8, 43.6, 48.5, 49.4 (table series).
  - External public debt (percent of GDP) reported as components in table.
- Central government fiscal operations (fiscal-year basis, Rwf billions, Table 2a highlights):
  - Revenue and grants: 1,418.8; 1,462.5; 1,478.9; 1,479.0; 1,578.3; 1,598.9; 1,601.9; 1,774.4; 1,767.9; 1,745.1 (series by fiscal year/revisions/projections).
  - Total expenditure and net lending: 1,720.1; 1,741.1; 1,784.9; 1,784.9; 1,856.9; 1,887.7; 1,848.8; 2,099.7; 2,083.6; 1,983.4.
  - Overall deficit (including grants): -301.3; -278.7; -306.1; -306.0; -278.6; -288.8; -246.8; -325.3; -315.7; -238.3 (Rwf billions).
  - Overall deficit (incl. grants, cash basis): -296.3; -290.1; -332.5; -332.4; -291.6; -308.8; -266.8; -338.5; -328.9; -251.4.
  - Financing: foreign financing (net) and net domestic financing components provided (detailed in Table 2a).

### Monetary and financial sector indicators
- Monetary survey (Billions of Rwandan Francs, Table 3 snapshots):
  - Reserve money: 246.9; 286.9; 328.2; 327.7; 325.6; 380.6; 369.4; 417.3 (series).
  - Broad money (M3) levels and year-on-year growth: broad money levels reported (1223.9; 1482.1; 1600.6; 1624.9; 1709.7; 1887.2; 1976.7; 2275.1) and growth rates (19.0; 21.1; 13.1; 14.7; 15.4; 13.7; 16.1; 15.6; 15.1).
  - Domestic credit and private sector credit levels provided (e.g., domestic credit 889.6; 1,221.4; 1,265.5; 1,447.3; 1,457.7; 1,707.4; 1,725.5; 1,925.4).
- Financial soundness (Table 5, banking sector, 2014–15):
  - NPLs/gross loans series around 6.7 down to 6.2 percent in observed quarters.
  - Return on average assets around 2.3–1.9 percent; return on average equity around 11.9–12.1 percent.
  - Liquid assets/total deposits series between 46.3 and 54.2 percent across periods.

### External sector, reserves, and balance of payments
- Balance of Payments highlights (Table 4, US$ millions):
  - Exports (f.o.b.): 683.5; 829.8; 695.3; 668.2; 923.7; 759.6; 712.6; 767.9 (series).
  - Imports (f.o.b.): 1,915.7; 2,154.2; 2,227.0; 2,244.1; 2,436.8; 2,210.1; 2,030.6; 2,050.2.
  - Trade balance: -1,232.3; -1,324.4; -1,531.7; -1,575.9; -1,513.1; -1,450.5; -1,318.0; -1,282.3.
  - Current account balance (incl. official transfers): -1,095.6; -957.1; -1,308.4; -1,368.2; -1,323.9; -1,272.5; -1,024.1; -908.0.
  - Gross official reserves (w/out prospective financing): 919.9; 1,149.0; 790.0; 759.2; 1,146.3; 782.2; 605.9; 730.7 (in US$ millions).
  - Gross official reserves in months of prospective imports of G&S: 3.6; 4.0; 3.1; 3.2; 4.1; 3.0; 2.5; 2.9 (series).

### Program targets, quantitative assessment criteria, and structural benchmarks
- Quantitative assessment criteria and indicative targets (status as of end-December 2015, Table 6):
  - Ceiling on the overall fiscal deficit, including grants (Billions Rwf): target 291; adjusted 313; actual 292 — Met.
  - Net foreign assets of the NBR at program exchange rate (floor on stock) (Billions Rwf): target 571; adjusted 533; actual 606 — Met.
  - Reserve money (ceiling on stock) (upper bound) (Billions Rwf): target 291; adjusted 270; actual 270 — Met.
  - External payment arrears (US$ millions) (ceiling on stock): 0 — Met.
  - Indicative target Net domestic financing (ceiling on flow): target 378; adjusted 195; actual Not met.
  - Domestic revenue collection (floor on flow): target 967; adjusted 967; actual Met.
  - Net accumulation of domestic arrears (ceiling on flow): target -12; adjusted -22; actual Met.
  - Total priority spending (floor on flow): target 721; adjusted 722; actual Met.
  - New external debt by nonfinancial public enterprises (ceiling on stock, US$ millions): 500 target; actual 102 — Met.
  - Consolidated domestic debt of public sector (ceiling on stock, eop) (Billions Rwf): target 523; adjusted 505; actual Met.
  - Program exchange rate used for RWF/US$: 746.5 (program exchange rate).

- Structural benchmarks (Status for 5th PSI review, Table 7):
  - Sub-national entities (416) to produce monthly, quarterly, and annual financial reports using a uniform template — Continuous, starting Q4 2015 — Met.
  - MINECOFIN to publish quarterly reports of budget execution against annual fiscal policy objectives within 60 days of end of each quarter — Continuous, starting Q4 2015 — Not met (implemented with delay).
  - Issue a 15-year government T-bond — end-May 2016 — Met.

### SCF disbursement schedule and Fund credit indicators
- Proposed schedule of disbursements under SCF arrangement (Table 8):
  - June 8, 2016: 72.0900 percent of quota; 101.51 Million SDR; 45.00 Million US$; Condition: Board approval of the SCF arrangement.
  - December 1, 2016: 36.0450 percent of quota; 50.76 Million SDR; 22.50 Million US$; Condition: Board completion of the first SCF review based on compliance with end-June 2016 conditionality.
  - June 9, 2017: 18.0225 percent of quota; 25.38 Million SDR; 11.25 Million US$; Condition: Board completion of the second SCF review based on compliance with end-December 2016 conditionality.
  - November 15, 2017: 18.0225 percent of quota; 25.38 Million SDR; 11.25 Million US$; Condition: Board completion of the third SCF review based on compliance with end-June 2017 conditionality.
  - Total: 144.1800 percent of quota; 203.03 Million SDR; 90.00 Million US$.
  - Note: Rwanda's quota is SDR 160.2 million. The Board approval and subsequent reviews of the SCF are expected to be done concurrently with the fifth, sixth, seventh and eighth reviews of the PSI, respectively.

- Indicators of Fund credit and obligations (Table 9 highlights):
  - Projections assume access of 90 percent of quota over 2016–17 and semi-annual disbursements.
  - Obligations to the Fund from existing and prospective credit (In millions of SDRs) show series: 1.5; 0.9; 1.6; 1.2; 1.1; 20.7; 30.6; 32.5; 32.3; 24.1; 6.0 (2015–2025).
  - Outstanding Fund credit based on existing and prospective drawings (end-of-period) (In millions of SDRs): 4.0; 110.6; 145.3; 144.5; 144.2; 124.2; 94.1; 62.1; 30.0; 6.0; 0.0 (2015–2025).
  - Corresponding values in millions of U.S. dollars and percent of gross international reserves, exports, debt service, GDP, and quota are provided in Table 9.

*Source: Rwandan authorities and IMF staff estimates and projections.*

### Annex I: External Sector Assessment

### Annex I: External Sector Assessment

### Overall Assessment
- The external position of Rwanda in 2015 was weaker than the level consistent with medium-term fundamentals and desirable policy settings.
- The recent sharp decline in mineral prices highlighted Rwanda’s susceptibility to external shocks given its narrow export base.
- Strain on foreign reserves underscored external vulnerabilities.
- Immediate risks to the external position are high; medium-term vulnerabilities persist and need to be addressed.
- Despite rising gross public and publicly guaranteed external debt (28.5 percent of GDP in 2015, up from 23.6 percent in 2014), Rwanda is assessed as having a low risk of external debt distress. About 75 percent of external debt is concessional multilateral and bilateral debt.
- Total gross external liabilities amounted to [45] percent of GDP at end-2015, of which about [16] percent were direct investments.
- Risks to public external debt sustainability have risen and the scope for expanding public external debt is limited.

### Potential policy responses (overall)
- Short-term: tighter fiscal and monetary policies, and greater exchange rate flexibility to dampen external imbalances and ease strain on foreign reserves.
- Medium-term: implement measures to diversify and expand exports; further lower costs of doing business; remove structural impediments to private sector growth to improve external competitiveness, attract larger FDI flows, and lower reliance on aid flows.
- Authorities should aim to rebuild foreign reserve buffers to more comfortable levels, supported by IMF financing under the Standby Credit Facility.

### Current account
Background
- The current account (CA) deficit deteriorated to 13.5 percent of GDP in 2015, from 12.2 percent in 2014.
- Sharp fall in mineral prices and production lowered mineral export receipts substantially.
- As a net oil importer, Rwanda benefited from lower oil prices; partly offset by increased volume of fuel imports, the goods trade balance improved modestly.
- Deterioration in services and primary income balances contributed to weakening of the CA balance.

Assessment
- The External Balance Assessment (EBA)-lite estimates a CA norm of -6.1 percent of GDP and a gap of -7.4 percent of GDP for 2015, largely explained by the regression residuals.
- The CA deficit is expected to deteriorate further in 2016 due to a large one-off purchase of aircraft for RwandAir, weaker mineral exports, and weaker services balance.
- Staff’s assessment, after accounting for temporary and structural factors not captured in the regression model, is that the CA balance is 2-4% weaker than the level implied by medium-term fundamentals and desirable policies.

### Real exchange rate (REER)
Background
- After depreciating by about 8 percent over 2010-2014, the CPI-based REER appreciated by about 8.4 percent between 2014 and 2015, recovering earlier losses.
- So far in 2016, the REER has been broadly stable.

Assessment
- The EBA-lite REER regression (using the CPI-based REER) points to an undervaluation of the Rwandan Franc of about 23 percent in 2015.
- In contrast, the CA regression estimates a large overvaluation of the Rwandan Franc in 2015.
- Based on various models and the CA balance now assessed to be weaker than fundamentals and desired policies, staff’s assessment is that the REER is likely now modestly overvalued.

### Capital and financial accounts: flows and policy measures
Background
- In 2015, main financing sources for the current account deficit were net multilateral and bilateral borrowings, net foreign direct investment (FDI) flows, capital grants, and drawdown of commercial banks’ net foreign assets (and official reserves).

Assessment
- In the near-term, concessional financing and grants will continue to play an important role in external financing.
- The low risk of external debt distress rating has expanded the envelope of available concessional borrowing, but scope for increasing public external borrowing further is limited if the current external debt risk rating is to be maintained.
- Implementation of ongoing structural reforms, improvement in energy efficiency, and continued ease of doing business are anticipated to attract larger FDI flows over the medium-term.

Policy recommendations (capital and financial accounts)
- Continue structural reforms in the private sector and remove impediments to private sector growth to improve competitiveness and attract FDI.
- Rebuild foreign reserve buffers to more comfortable levels, supported by IMF financing under the Standby Credit Facility.

### FX intervention and reserves level
Background
- Gross reserves fell to 3.6 months of prospective imports of goods and services in 2015, from 4.2 months of imports in 2014, and below the average (5 months of imports) over the last decade.
- With the drop in mineral export receipts, there was a drawdown of central bank (and commercial bank) reserves.

Assessment
- Official reserves in 2015 were below the level deemed optimal for Rwanda, given its low export base and vulnerability to commodity price shocks.
- Staff views an optimal level of reserves for Rwanda to lie within the range of 4-5 months of prospective imports, higher than the traditional metric of 3 months of imports cover.
- Without policy interventions, more exchange rate flexibility, and additional financial support, staff assesses that in 2016 and 2017 reserves will fall further below the 4-5 months of imports cover deemed adequate.

### Technical Background Notes (selected)
- The EBA-lite REER index estimates a REER undervaluation of 23 percent. In contrast, the CA balance regression points to overvaluation of the Rwandan Franc in 2015 of 87 percent, based on EBA current account gap estimate and a long-run elasticity of -0.09.
- Staff note the wide disparity in REER under/overvaluation estimates from these regression models, highlighting model difficulties and residual-driven explanations; other fundamental factors may not be captured.
- The reserve adequacy assessment used the IMF’s approach “Assessing Reserve Adequacy in Credit-Constraint-Economies (ARA-CCC)”. In the assessment:
  - Rwanda is classified as a resource-rich country, as the share of mineral exports (as a percent of total exports of goods) has been 29 percent on average over the last decade.
  - Staff assumed a higher than average unconditional probability of external shock (0.75) and that the cost of holding reserves was 4 percent (the IMF Executive Board’s recommended level).

### Key statistics and indicators (selected, as reported)
- Gross public and publicly guaranteed external debt: 28.5 percent of GDP in 2015 (23.6 percent in 2014).
- Share of external debt concessional multilateral and bilateral: about 75 percent.
- Total gross external liabilities: [45] percent of GDP at end-2015.
- Direct investments share of external liabilities: about [16] percent at end-2015.
- Current account deficit: 13.5 percent of GDP in 2015 (12.2 percent in 2014).
- EBA-lite CA norm: -6.1 percent of GDP (2015); CA gap: -7.4 percent of GDP (2015).
- CPI-based REER movement: depreciated about 8 percent over 2010-2014; appreciated about 8.4 percent between 2014 and 2015.
- EBA-lite REER undervaluation estimate: 23 percent (2015).
- CA regression REER overvaluation estimate: 87 percent (2015).
- Gross reserves: 3.6 months of prospective imports of goods and services in 2015 (4.2 months in 2014; average over last decade 5 months).
- Staff-assessed optimal reserves range: 4-5 months of prospective imports.
- Reserve adequacy assessment assumptions: resource-rich classification (mineral exports average 29 percent of total exports of goods), unconditional probability of external shock 0.75, cost of holding reserves 4 percent.

*Source: Annex I: External Sector Assessment, _cr16153 - Annex I: External Sector Assessment.*

### 11.      Performance against end-December 2015 quantitative targets under the PSI, Program

### 11. Performance against end-December 2015 quantitative targets under the PSI, Program

### Performance versus end-December 2015 QACs and ITs
- All end-December 2015 quantitative assessment criteria (QAC) and indicative targets (IT) were met, except:
  - The indicative ceiling on net domestic financing was exceeded slightly due to higher than expected repayment of arrears.
- All structural benchmarks (SB) were met on time, except:
  - Publication of the quarterly report on budget execution was delayed; commitment to start publishing it within 60 days after the end of the quarter.

### Macroeconomic outlook and policy summary (2016 and medium term)
- External pressures and sources:
  - Shock to global mineral prices; minerals accounted for 34 percent of Rwanda’s exports in 2014.
  - Increasing demand for imports placing pressure on reserves.
  - Request for IMF Standby-Credit Facility to ensure reserves stay above the critical level of three months of imports.
- Expected transformation of exports over time:
  - From predominantly raw commodities to more manufacturing, processed commodities and meetings, incentives, conferences and events (MICE) tourism.
- Main policy adjustment instruments:
  - Exchange rate: allowed to continue to depreciate in the coming years.
  - Monetary policy: BNR to implement a more prudent monetary policy in conjunction with expected depreciation.
  - Liquidity and money market development: improve management of liquidity so money market rates align to the key policy rate (KRR) and develop the interbank market as preparation for interest-rate operational framework by end 2018.
  - Fiscal consolidation: withdrawal of stimulus substantially from beginning of fiscal year 2016/17.
  - Medium-term structural measures in national export strategy to transform tourism, broaden manufacturing base, and increase domestic processing of commodities.

### Real sector projections
- GDP growth:
  - 2015: 6.9 percent.
  - 2016: 6 percent (expected).
  - 2017: 6 percent (expected).
  - 2018-19: return to 7 percent.
- Sectoral outlook:
  - Construction, manufacturing industry, and services: projected in the 6½ -7 percent range.
  - Utilities: projected well above that range.
  - Agriculture: projected growth of 4.3 percent in 2016; expected to pick up to 5 percent in 2017.
  - Mining output: expected to continue to drop in 2016 due to depressed international prices.
  - Drivers: construction buoyant (private investment and new roads); manufacturing and utilities boosted by recent investments; services led by real estate activities, financial services, ICT, and transport services (Rwanda Air fleet expansion).

### Inflation outlook
- Monetary authorities intend to contain end-period CPI at:
  - 4.7 percent in 2016.
  - At or below 5 percent for the next three years.
- Drivers:
  - Projected drop in import prices in foreign currency in 2016 should help mitigate inflation in 2016.
  - Later years: pick-up in import prices combined with exchange rate flexibility expected to lead to somewhat higher CPI inflation despite a very cautious NBR monetary stance.

### Fiscal policy (2015/16 revised budget and projections)
- 2015/16 revised budget:
  - Total expenditure and net lending: RWF 1,785 billion (29 percent of GDP).
  - Total revenue and grants: RWF 1,478.9 billion (24.1 percent of GDP).
  - Overall deficit (cash basis): RWF 332.6 billion (5.4 percent of GDP) — 0.1 percent of GDP higher than 2014/15 deficit.
  - Revision reflected front loading of donor budget support funds.
- Fiscal policy objectives 2016/17–2017/18:
  - Reduce foreign exchange component of the budget to compress imports and relieve reserves pressure through greater domestic revenue mobilization and expenditure prioritization.
  - Tax revenue collections projected to rise modestly to 16 percent of GDP in 2016/17 from 15.9 percent in 2015/16.
    - Increased fuel levy yield contributing; taxes on international trade projected to rise marginally as import-reducing policies take effect.
    - Delay in property tax reform: study commissioned to assess a 1 percent property value tax; recommendations to be incorporated and draft law resubmitted to cabinet by end June 2016.
  - Total expenditure and net lending for 2016/17 projected at 27.1 percent of GDP (RWF 38.9 billion, equivalent to 0.6 percent of GDP, lower than projected in the 4th PSI review).
  - Compression of domestic capital expenditure (excluding Global Fund projects) in 2016/17: reduction of RWF 102.1 billion (equivalent to 1.5 percent of GDP).
  - Overall deficit (including grants, cash basis) projected at 3.9 percent of GDP in 2016/17 — down 0.5 percentage points versus the 4th PSI review projections and 1.5 percentage points versus 2015/16 budget.
- Fiscal stance 2017/18:
  - Total revenue and grants projected at 23 percent of GDP (of which 4.9 percent of GDP comprise grants).
  - Tax revenue projected to rise by RWF 126.2 billion compared to 2016/17; in RWF terms RWF 16.8 billion lower than in the 4th review but tax-to-GDP ratio at 16.0 percent is higher than in the 4th review.
  - Total expenditure and net lending projected at 26.1 percent of GDP (nominally RWF 100.2 billion lower than in the 4th review which projected 26.6 percent of GDP).
  - Overall cash deficit (including grants) projected at 3.3 percent of GDP compared to 4.2 percent of GDP projected in the 4th review.
- Medium-term objective:
  - Fiscal consolidation through revenue mobilization and expenditure prioritization to reduce the fiscal gap and reliance on external funds while ensuring prudent borrowing to keep total debt sustainable.

### Debt dynamics and policy
- Public and publicly guaranteed (PPG) debt remain at low risk of debt distress.
- Pressures:
  - Lower exports and private inflows combined with still high public investment imports increase balance of payments and foreign exchange reserve pressures.
- Policy response:
  - Quick measures to promote export diversification and import substitution in near term.
  - Debt policy to maximize contracting of concessional and semi-concessional loans.
  - Ensure prudent borrowing on advantageous terms and promote domestic debt market to reduce forex risk exposure.

### Structural reform measures (new)
- Measures to support QAC attainment and fiscal reporting improvement:
  - Put in place monitoring systems for periodic accurate reporting on project grants disbursements and utilization of proceeds from project accounts; initially record donor project support disbursement and use of funds in one sector (health or education), with later broadening to all projects.
  - Establish a timeline by end-September 2016 for transition to the GFS2014 framework (in line with EAMU Protocol requirement).
  - Design strategy to incorporate fiscal risks and foreign exchange needs into project planning assessments, starting with PPPs by end-June 2017.
  - Produce a detailed report on tax expenditures for FY15/16 and resubmit to parliament revised legislation on Fixed Asset Taxes, incorporating discussions on valuation methodologies.

### Monetary and financial sector policies
- BNR operational and market development actions:
  - Finalize regulatory framework to shift from simple interbank operations to a true Horizontal REPO.
  - Identify and tackle factors that lead to high and rigid bank lending rates to improve monetary policy transmission.
  - Issue a fifteen-year bond in May 2016 to complement existing 3, 5, 7 and 10-year bonds.
  - Increase retail investor participation in government bonds from 1.0 percent in February 2014 to 10 percent in February 2016 (attributed to BNR and MINECOFIN awareness campaigns).
  - Move from reserve money targeting to a more price-based monetary policy framework:
    - Define a relatively narrow range of excess reserves to promote interbank development and use of Key Repo Rate (KRR).
    - Identify a policy interest rate range consistent with the excess reserves range (SB).
  - Introduce true REPOs including transfer of collateral across banks (SB).
- Financial soundness and regulatory developments:
  - BNR plans to issue regulation on new capital requirements under Basel II/III by end of 2016, including minimum capital ratios plus a conservation buffer of 2.5 percent.
  - Finalize revised credit information sharing (CIS) law by June 2016 (review began January 2016 with World Bank support).
  - Reviews and planned reforms: loan classification & provisions; provisions for development banks; financial disclosure; publication of financial statements; fast-tracking review of the Banking law.
  - Reduce NPLs of microfinance institutions (MFIs) by intensifying on-site inspection of all UMURENGE SACCOS, focusing on credit risk and training staff on loan portfolio quality management.
- Credit growth projection:
  - Credit to the private sector expected to grow by 16 percent in 2016 (lower than 26.7 percent achieved in 2015).

### Exchange rate and external sector policies
- Current account and reserves:
  - Current account projected to deteriorate in 2016 but improve in 2017 by about US$350 million or 4.4 percentage points of GDP.
  - Deterioration drivers in 2016: decline in exports (depressed mineral prices), lower private remittances, and projected increase in imports driven by RwandAir (new external borrowing to purchase two airbuses) and Kigali Convention Centre (KCC) imports.
  - Excluding RwandAir and KCC imports (fully financed in the financial account), imports as a share of GDP are expected to be reduced over 2015-2017.
  - BNR expected to draw down reserves to finance the balance of payments: months of imports (goods and services) coverage from 3.6 in 2015 to 3.2 months in 2016.
- Exchange rate policy:
  - Continue to allow exchange rate adjustment as necessary in line with fundamentals.
  - Build technical capacity among foreign exchange dealers and introduce a code of conduct to facilitate an interbank foreign exchange market that provides better signals for official rate adjustment (harmonization with EAC practices).

### Medium-term policies to reduce external imbalances (priority sectors and measures)
- Priority sectors identified to foster economic activity and increase exports or reduce imports:
  - Textiles, garments and leather industry
  - Agriculture export crops
  - Agri-business
  - Construction
  - Livestock
  - Wood industry
  - Minerals
  - Tourism
  - ICT
  - Trade and investment facilitation
- Policy measures:
  - Import substitution focusing on cement, sugar, rice and clothing:
    - Sugar: seeking new investor and offering land for sugar cane plantations.
    - Rice: expanding acreage by 8,000 hectares aiming for self-sufficiency by 2018.
    - Cement: plans to raise production of national cement company six fold to 600,000 tonnes per year.
  - Export promotion supported by an export promotion fund:
    - Targeted areas: processed food, textiles, garments and leather industry (anchor firm already exporting).
    - Plans to start flower exports and expand acreage to 85 hectares.
    - Plans to export laptops assembled in Rwanda.
    - Increase value of existing exports: fully washed coffee increased to 50 percent in 2015 from 21 percent in 2010; target to reach about 80 percent over the next two years.
  - MICE and tourism:
    - Tourism generates about a third of total export of goods and services earnings.
    - MICE strategy aims to make Kigali a hub for major regional and international conferences.
    - Kigali Convention Centre opening scheduled for June 2016; together with new upscale hotels will provide high quality rooms for up to 6000 guests by end year.
    - RwandAir new routes to India and China support these plans.
    - MICE tourism revenues were US$39 million in 2015 and projected to increase significantly in 2016/2017 as more than 20 international events are expected to be hosted in Rwanda.

*Source: IMF staff report excerpt — "Performance against end-December 2015 quantitative targets under the PSI, Program" (section content).*

### 34.       Over the past three years, the Government has embarked on comprehensive tax reforms. A

### _cr16153 - 34.       Over the past three years, the Government has embarked on comprehensive tax reforms. A

### Tax reform strategy and implementation
- A medium-term tax reform plan was developed identifying policies and administrative measures aimed at:
  - improving taxpayers’ compliance;
  - reducing exemptions;
  - strengthening risk management; and
  - broadening the tax base.
- Going forward, the strategy focuses on implementation and monitoring the anticipated outcomes.

### Revenue Administration (RRA) diagnostics and planning
- The RRA underwent the Tax Administration Diagnostic Assessment (TADAT) from the IMF Fiscal Affairs Department, which offered insights on reform priorities.
- Actions to respond to the identified weaknesses will be incorporated into:
  - the RRA Three-year Strategic Plan; and
  - consequent annual action plans.

### Revisions to the Tax Procedure Law (planned provisions)
- The Tax Procedure Law is being revised to:
  - Improve use of the Electronic Billing Machines (EBMs). Some sectors will be made liable for VAT payments regardless of turnover levels, i.e. evolution to more sector-based rather than threshold-based approach;
  - Allow taxpayers who never declared taxes but later declare voluntarily to be considered as voluntarily disclosure;
  - Require tax litigation cases to pass through an administrative review by the Commissioner General prior to going to court, in order to reduce the number of cases that go to court; and
  - Provide more comprehensive rules for handling false declarations or incomplete returns submitted to the tax administration.

### Request for SCF arrangement and PSI program changes
- The Government of Rwanda requests an eighteen month arrangement under the Standby Credit Facility (SCF) with total access of 90 percent of Rwanda’s IMF quota (SDR 144.18 million) to work in conjunction with the Policy Support Instrument (PSI) to augment the reserves of the National Bank of Rwanda (BNR).
- Requests include:
  - completion of the fifth review under the PSI and approval of the SCF arrangement;
  - extension of the current PSI program ending in November of this year to December 2017, and addition of two additional semi-annual reviews (7th and 8th reviews);
  - the 6th review expected in December 2016, based on end-June 2016 quantitative targets and structural measures implemented through end-September 2016;
  - the 7th review expected in May-June 2017, based on end-December 2016 quantitative targets and structural measures through end-March 2017.
- Program conditionality design changes requested:
  - eliminate the indicative ceiling on public-sector domestic debt (largely redundant with the new ceiling on the fiscal deficit and retained ceilings on net domestic financing and external borrowing by public enterprises);
  - modify the definition for the indicative target on domestic arrears accrual; and
  - streamline program adjustors and request minor revisions to end-June quantitative program targets for reserve money.

### Quantitative assessment criteria, performance criteria, and indicative targets (selected figures)
- Assessment/Performance criteria (selected table entries, December 2016 / June 2017 proposed program):
  - Ceiling on the overall fiscal deficit, including grants: 206.8; 206.8; 100.8; 246.8
  - Net foreign assets of the NBR at program exchange rate (floor on stock): 465.0; 465.0; 520.0; 471.8
  - Reserve money (ceiling on stock) (upper bound): 315.3; 305.7; 320.8; 347.9
  - Reserve money (ceiling on stock): 309.1; 299.1; 313.9; 340.4
  - Reserve money (ceiling on stock) (lower bound): 302.9; 292.5; 307.0; 332.9
  - External payment arrears (US$ millions) (ceiling on stock): 0.0; 0.0; 0.0; 0.0
- Indicative targets (selected table entries):
  - Net domestic financing (ceiling on flow): 203.0; 203.0; -123.6; -50.3
  - Domestic revenue collection (floor on flow): 562.0; 562.4; 539.0; 1157.1
  - Net accumulation of domestic arrears (ceiling on flow): -5.6; -5.6; -10.0; -20.0
  - Total priority spending (floor on flow): 366.2; 366.2; 338.8; 707.5
  - New external debt contracted or guaranteed by nonfinancial public enterprises (US$ millions) (ceiling on stock): 500.0; 500.0; 500.0; 500.0
  - Consolidated domestic debt of public sector (ceiling on stock, eop): 522.9; .........
- Memorandum items (selected):
  - Total budget support (US$ millions): 97.5; 151.5; 309.0; 439.1
  - Budget support grants (US$ millions): 97.5; 130.3; 131.0; 261.1
  - Budget support loans (US$ millions): 0.0; 21.1; 178.0; 178.0
  - RWF/US$ program exchange rate: 746.5; 807.2; 807.2; 807.2

### New structural benchmarks under the PSI-supported program and SCF arrangement (selected measures and target dates)
- Monetary:
  - Issue 15-year government Treasury bond — End-May 2016
  - Establish the road map for secondary market development of Government debt securities; develop capacity building plan for banks’ treasurers on domestic securities — End-September 2016
  - Define and target a range of excess reserves conducive to developing the interbank market — End- December 2016
  - Introduce the real horizontal REPOs including transfer of collateral across banks — End-March 2017
  - Develop a methodology to identify policy interest rate consistent with the identified range of excess reserves — End- June 2017
- Public Financial Management:
  - Provide quarterly revenues, expenditures, and financing estimates for the budgetary central government levels within 60 days of the end of each quarter — Each quarter
  - Develop and implement IPSAS roadmap which includes government accounting policy for fixed assets — End-June 2016
  - Submit revised National Investment Policy to Cabinet — End-June 2016
  - Establish a timeline for the transition of fiscal reporting into the GFS14 framework — End-September 2016
  - Operationalize IFMIS and E-procurement interface protocols — End-December 2016
  - Design a strategy to incorporate fiscal risks and foreign exchange needs into project planning assessments, starting with PPPs — End-June 2017
  - Set up framework for recording donor project support in one sector as initial step to broader establishment — End-December 2016
- Fiscal Revenues:
  - Submit revised Law on Tax Procedures to Cabinet — End-June 2016
  - Share draft study on new tax regime for agriculture — End-September 2017
  - Produce detailed report on tax expenditures for FY15/16 — End December 2016
  - Submit to Parliament revised legislation on fixed asset tax — End-March 2017

### Technical Memorandum of Understanding (TMU) — key points
- TMU defines quantitative targets for the period January 1, 2016–December 31, 2017 supported by the PSI and SCF; it updates the December 2015 TMU.
- Quantitative program assessment through AC/PC and IT for test dates June 30, 2016 and December 31, 2016.
- AC/PC apply to:
  - Floor on stock of net foreign assets (NFA) of the NBR;
  - Ceiling on stock of reserve money;
  - Ceiling on the overall deficit, including grants as measured on a commitment basis;
  - Ceiling on stock of external payment arrears of the public sector (continuous assessment).
- IT apply to:
  - Ceiling on flow of net domestic financing (NDF) of the central government;
  - 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 contracting or guaranteeing of new non-concessional external debt of nonfinancial public enterprises (continuous); and
  - Floor on flow of priority spending.
- Program exchange rates from January 1, 2016 (US$ per currency unit, unless indicated otherwise):
  - Rwanda Franc (per US$): 807.2
  - Euro: 1.12
  - British Pound: 1.44
  - Japanese Yen (per US$): 113.6
  - SDR: 1.40

### Definitions and measurement (selected)
- Net domestic financing (NDF) definition:
  - Change in sum of (i) net banking sector credit to the government and (ii) non-bank holdings of government domestically issued debt.
  - Net banking sector credit to the government includes consolidated credit to the government from the banking system (NBR and commercial banks) and 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 and the overall fiscal deficit including grants:
  - Upward adjustment by the amount of any shortfall between actual and programmed budgetary grants and loans up to a maximum of RWF 65 billion;
  - Upward adjustment up to a maximum of RWF65 billion for foreign financed capital expenditure financed with draw-down of accumulated government deposits;
  - Upward adjustment up to a maximum of RWF65 billion for expenditure arising from pre-financing of Peace Keeping Operations.
- Overall fiscal deficit including grants:
  - Measured on a commitment basis consistent with the 2001 Government Financial Statistics Manual (GFSM); government expenditure defined on basis of payment orders accepted by the Treasury and those executed with external resources.
- Net accumulation of domestic expenditure arrears:
  - Domestic expenditure arrears defined as unpaid claims overdue by more than 90 days; excludes claims preceding 1994.
- Limit on new external debt of nonfinancial public enterprises:
  - Ceiling applies to contracting and guaranteeing of new external borrowing with non-residents; excludes external borrowing by Bank of Kigali and Rwanda Development Bank (BRD).

*Source: _cr16153 - 34.       Over the past three years, the Government has embarked on comprehensive tax reforms. A*

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

### 22. A continuous assessment criterion applies to the non-accumulation of payment arrears on external debt contracted or guaranteed by the public sector

### Continuous assessment criterion on external payment arrears
- External payment arrears are defined as external debt service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements.
- Arrears exclude obligations that are subject to rescheduling.

### Targets for monetary aggregates

#### Net foreign assets (NFA) of the National Bank of Rwanda (NBR) (QAC/PC)
- A floor applies to the NFA of the NBR for June 30, 2016 and December 31, 2016.
- Definition: NFA of the NBR in Rwandan francs is defined, consistent with the definition of the Special Data Dissemination Standard (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.
- Adjuster:
  - 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 of the MEFP. This adjustment will be capped at the equivalent of US$85 million, evaluated in Rwanda francs at the program exchange rate.

#### Reserve money (QAC, PC)
- A ceiling applies to the stock of reserve money for June 30, 2016, and December 31, 2016 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+/- 2.2 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 defined as 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.

### Data reporting requirements (program monitoring)
- Timing: Unless specified otherwise, weekly data within seven days of the end of each week; monthly data within five weeks of the end of each month; quarterly data within eight weeks of the end of each quarter; annual data as available.
- Specific reporting obligations:
  - Monthly: Data on NDF (showing separately treasury bills and government bonds outstanding, other government debt, and central government deposits), each type of debt shown by debt holder. Government deposits with the NBR and with commercial banks separated from public enterprises and autonomous public agencies.
  - Monthly: Detailed data on domestic revenues.
  - Quarterly: Data on priority expenditure; data on accumulation and repayment of domestic arrears and the remaining previous year’s stock of arrears.
  - Weekly: Data on foreign assets and foreign liabilities of the NBR, including breakdown of assets that are pledged or encumbered; 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 conversion into Rwanda francs.
  - Weekly: Data on reserve money, including daily and weekly balance sheet of the NBR showing all items listed in the definitions of reserve money.
- Policy change notification and program performance:
  - Authorities will inform IMF staff in writing prior to making any changes in economic and financial policies that could affect the outcome of the financial program (including customs and tax laws, wage policy, and financial support to public and private enterprises).
  - Authorities will inform IMF staff of changes affecting respect of continuous QACs and ITs.
  - Authorities will furnish a description of program performance according to QACs and ITs as well as structural benchmarks within 8 weeks of a test date.
  - Authorities engage to submit information to IMF staff with the frequency and submission time lag indicated in TMU Table 1. The information should be mailed electronically to the Fund (email: afrrwa@imf.org).

- Selected reporting frequencies from TMU Table 1 (frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Semi-annually (SA); Irregular (I)):
  - Exchange Rates: D (frequency of data), W (frequency of reporting), D (frequency of publication).
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: W, W, M.
  - Reserve/Base Money: W, W, M.
  - Broad Money: M, M, M.
  - Central Bank Balance Sheet: W, W, M.
  - Consolidated Balance Sheet of the Banking System: M, M, M.
  - Volume of transactions in the interbank money market and foreign exchange markets and sales of foreign currencies by NBR to commercial banks: D, W, W.
  - Consumer Price Index: M, M, M.
  - Composite Index of Economic Activity (CIEA) and sub-components compiled by the NBR: M, M, M.
  - Revenue, Expenditure, Balance and Composition of Financing – General Government: Q, Q, Q.
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Q, Q, Q.
  - Comprehensive list of tax and non tax revenues: M, M, M.
  - Comprehensive list of domestic arrears of the government: SA, SA, SA.
  - Stocks of public sector and public-Guaranteed Debt as compiled by MINECOFIN and NBR: Q, Q, Q.
  - External Current Account Balance: A, SA, A.
  - Exports and Imports of Goods and subcomponents: M, M, Q.
  - Exports and Imports of Goods and Services and subcomponents: A, A, A.
  - GDP/GNP: A, Q (data); Q, SA (reporting); Q (publication).

### Debt Sustainability Analysis (DSA) — summary findings and background

#### Background and recent developments
- Real GDP growth: 6.9 percent in 2015.
- Current account deficit: 13.5 percent of GDP in 2015; projected to deteriorate to 16.5 percent of GDP in 2016 due to weak mineral exports and aircraft purchases by RwandAir.
- Foreign reserves coverage: 3.6 months of prospective imports (as of 2015 data context).
- Real GDP growth projection: 6 percent in 2016 and 2017.
- Public sector debt (end-2015):
  - Total public sector debt: 35.4 percent of GDP.
  - External debt of the public sector: 28.5 percent of GDP.
  - Domestic debt: 6.9 percent of GDP.
- Public external guaranteed debt has been rising mainly due to RwandAir’s fleet expansion.

#### Key DSA results and risk assessment
- Overall assessment: Rwanda continues to face a low risk of external debt distress (consistent with analysis for the 4th Review under the PSI).
- Under the baseline scenario all external debt burden indicators are projected to remain below the policy-dependent thresholds.
- Standard stress tests show temporary breaches of the debt service-to-exports and debt service-to-revenue ratios in 2023 when the Eurobond issued in 2013 matures.
  - These breaches are temporary and the assessment of a low risk of external debt distress is maintained, assuming Rwanda will be able to refinance the maturing Eurobond.
- The ratio of the present value of public sector debt-to-GDP remains below the policy dependent benchmark both under the baseline and standard stress tests.
- Policy implication: Until exports expand and are diversified further, Rwanda needs to remain prudent about the terms and amount of external debt it contracts/guarantees.

#### Selected data and projections from tables and boxes (values preserved as in source)
- Baseline macro projections highlights (Table 2 excerpts):
  - Nominal GDP (RF billions): 4,864; 5,394; 5,837; 6,459; 7,164; 8,031; 9,041; 10,180; 11,460; 20,424; 23,055; 37,426; 68,511
  - Real GDP (percentage change): 4.7; 7.0; 6.9; 6.0; 6.0; 7.0; 7.2; 7.5; 7.5; 7.5; 7.5; 7.5; 7.5
  - GDP deflator (percentage change): 4.7; 3.7; 1.2; 4.4; 4.6; 4.8; 5.0; 4.7; 4.7; 5.0; 5.0; 5.0; 5.0
  - External grants (incl. HIPC relief) (percent of GDP): 8.6; 7.4; 6.4; 5.6; 5.2; 5.2; 3.2; 3.0; 2.9; 1.6; 1.4; 0.9; 0.5
  - Revenue (excl. external grants) (percent of GDP): 16.5; 16.7; 18.6; 18.2; 18.1; 18.3; 18.9; 19.2; 19.5; 20.6; 20.8; 21.5; 22.5
  - Primary expenditures (percent of GDP): 28.8; 28.2; 29.1; 27.6; 25.7; 25.5; 25.1; 24.9; 24.8; 24.1; 23.6; 23.4; (final value 23.4 in table)
  - Primary balance, incl. external grants (percent of GDP): -3.7; -4.2; -4.1; -3.8; -2.4; -2.0; -3.0; -2.7; -2.4; -1.9; -1.8; -1.2; -0.1
  - Net domestic financing: 0.0; 3.2; 1.6; 0.8; 0.8; -1.3; 0.2; 0.9; 0.6; 0.5; 0.5; 0.5; 0.5
  - Interest rate (percent): 8.0 (consistent across years listed)
  - New external borrowing (1) (percent of GDP): 1.9; 3.2; 2.6; 4.6; 3.2; 5.3; 4.8; 3.6; 3.3; 2.6; 2.6; 2.2; 0.4
  - Grant element of new external borrowing (percent): 29.5; 48.5; 52.9; 47.2; 47.5; 51.9; 38.3; 35.8; 24.4; 17.8
  - Exports of goods and services (percent of GDP): 15.6; 16.9; 17.3; 16.7; 17.6; 18.4; 18.7; 18.9; 20.4; 20.4; 20.4; 20.4; 20.4
  - Imports of goods and services (percent of GDP): 32.5; 33.5; 34.9; 37.3; 33.3; 32.2; 31.9; 32.1; 32.3; 32.3; 32.3; 32.3; 32.3
  - Current account, incl. official transfers (percent of GDP): -7.4; -10.5; -13.5; -16.5; -12.0; -10.2; -11.1; -11.1; -11.0; -9.3; -9.0; -9.3; -9.5
  - Foreign Direct Investment (percent of GDP): 3.4; 3.4; 3.9; 3.9; 4.0; 4.2; 4.5; 4.8; 5.1; 4.5; 4.5; 4.5; 4.5
  - (Source: Rwandan authorities, IMF and World Bank staff. Note 1: Includes publicly guaranteed external borrowing.)
- Table 3 selected comparisons (stocks and ratios):
  - Stock of public and publicly-guaranteed (PPG) external debt (Millions of U.S. dollars): 2,956; 3,363; 3,716 (current DSA) versus 3,027; 3,431; 3,851 (previous DSA).
  - Percent of GDP (PPG external debt): 36.0; 37.6; 38.2 (current) versus 37.8; 41.7; 44.7 (previous).
  - Present value (PV) of PPG external debt (Millions of U.S. dollars): 1,936; 2,114; 2,293 (current) versus 1,980; 2,196; 2,393 (previous).
  - PV of PPG external debt to revenues (percent): 109.0; 120.6; 113.7 (current) versus 116.1; 128.3; 132.3 (previous).
  - PV of PPG external debt to exports (percent): 140.1; 138.7; 134.1 (current) versus 148.1; 151.6; 151.0 (previous).
  - PPG external debt service to revenues (percent): 6.1; 8.0; 8.6 (current) versus 3.5; 5.7; 7.8 (previous).
  - PPG external debt service to exports (percent): 7.9; 9.2; 10.2 (current) versus 4.5; 6.7; 8.9 (previous).
  - Discount rate (percent): 5.0 (consistent across entries).

#### Box 1 — Macroeconomic framework (key highlights)
- Growth: Long-run growth projected at 7.5 percent.
- External sector: Exports of goods and services (as a percent of GDP) are expected to gradually rise; external current account projected to remain in deficit but the gap is expected to narrow.
- Inflation: At the end of 2015 inflation was 4.5 percent and is expected to rise and be maintained at the authorities’ medium-term target of 5 percent.
- Reserves: Reserve buffers expected to recover and attain coverage of 4.5 months of prospective imports by 2023.
- Fiscal outlook: Gradual and consistent rise in domestic revenues (excluding grants) from 2018 to 2036; primary expenditures forecast to remain high.
- Grants: Assumes tapering of external donor assistance.
- External borrowing: 2016-2021 financing mainly from contracted external multilateral and bilateral debt and IMF Standby Credit Facility; public guaranteed borrowing for RwandAir expansion and Kigali Convention Center via commercial debt; from 2022 onward increasing share from commercial debt and international capital markets.
- Domestic borrowing: Framework assumes that over the long-term net domestic borrowing will be (text truncated in source).

*Source: IMF and World Bank staff, Rwanda DSA material (May 25, 2016).*

### 0.5 percent of GDP. Over time, the composition of domestic borrowing is also expected to shift towards

### _cr16153 - 0.5 percent of GDP. Over time, the composition of domestic borrowing is also expected to shift towards

### Domestic borrowing and interest rate assumptions
- Domestic borrowing share: 0.5 percent of GDP.
- Over time, composition of domestic borrowing expected to shift towards medium- and long-term debt as authorities intensify efforts to develop the local government bond market.
- Domestic interest rates: New domestic borrowing is expected to be contracted at a nominal interest rate of 8 percent.

### A. External DSA — key findings
- Overall assessment: Rwanda’s debt is assessed to be sustainable with low risk of debt distress.
- Policy/institutional classification: Rwanda is classified as a “strong” performer based on the 3-year average of the ratings under the World Bank’s Country Policy and Institutional Assessment (CPIA).
- Implication of classification: Higher debt sustainability thresholds apply for strong performers.
- Baseline projections: Under the baseline scenario all debt burden indicators are projected to remain below the policy-dependent thresholds.
- Stress-test result for 2023: Standard stress tests show temporary breaches in 2023 (when the Eurobond issued in 2013 is set to mature) of:
  - the debt service-to-revenue ratio threshold, and
  - the debt service-to-exports ratio threshold.
- Interpretation of breaches: Temporary breaches highlight vulnerability to external shocks and liquidity pressures at the time the Eurobond matures.
- Mitigating factors noted:
  - Breaches are temporary.
  - Relatively low level of external debt.
  - Strengthening repayment capacity through expansion of export base and tax revenues.
  - Assumption that Rwanda will refinance the maturing Eurobond.
- Final external assessment: Low risk of debt distress for external public and public guaranteed debt.

### B. Public DSA — key findings
- Adding domestic public debt to external debt does not change the overall result: public debt remains assessed at low risk.
- Evolution: Total public debt indicators broadly follow those of external debt under the baseline.
- Stability: DSA suggests public debt remains stable under the baseline.
- Indicators examined:
  - PV of public debt-to-GDP,
  - PV of public debt-to-revenue,
  - Debt service of public debt-to-revenue.
- Long-term path: Projected to be broadly stable in the baseline.
- PV of public debt-to-GDP: Remains comfortably below the indicative benchmark throughout the assessment period.
- Sensitivity to revenues: Sharp increase in the PV of debt-to-revenue indicator when the primary balance is assumed fixed at 2016 level, highlighting the importance of securing the revenue gains assumed under the baseline.

### Thresholds for strong performers (as stated)
- PV of debt to exports, GDP and government revenue thresholds: 200, 50 and 300 percent, respectively.
- Debt service thresholds: 25 and 22 percent of exports and revenue, respectively.

### Authorities’ view
- Authorities broadly agree with the DSA results and conclusion of a low risk of external debt distress.
- They concur that the main risk to public debt vulnerability is the narrow export base.
- Authorities’ expectations:
  - Ongoing investments and measures to expand and diversify traditional and non-traditional exports and tourism will help limit this risk.
  - A prudent medium-term debt management strategy and careful prioritization of future projects and their financing are necessary to contain public debt vulnerabilities.

### Conclusion — summary judgment and risks
- Overall judgment: Rwanda continues to face a low risk of debt distress but remains subject to external vulnerabilities.
- Baseline outcome: Debt burden indicators remain below policy-related thresholds in the baseline.
- Stress-test caveat: Temporary breaches of debt service-to-revenue and debt service-to-exports ratios in 2023 under standard stress tests.
- Implication of breaches: Underscore susceptibility to external shocks and potential future liquidity pressures.
- Mitigation condition: Risk from these breaches can be mitigated by the authorities’ ability to refinance non-concessional debt falling due in 2023, provided sound macroeconomic and fiscal policies are maintained.
- Medium-term outlook: Public debt, though increasing, remains comparatively low and the profile of Rwanda’s external debt burden is expected to improve over time given expected strong growth, expansion in exports and improvement in revenues.

* _cr16153 - 0.5 percent of GDP. Over time, the composition of domestic borrowing is also expected to shift towards*

### 8.      The main risk to Rwanda’s debt sustainability remains the narrow export base.

### 8.      The main risk to Rwanda’s debt sustainability remains the narrow export base.

### Main risk and baseline assessment
- The main risk to debt sustainability is a narrow export base heavily affected by fluctuating commodity prices and output.
- Current weakness in mineral exports highlights vulnerability; if anticipated medium-to long-term export expansion and diversification fail to materialize, longer-term risks to debt sustainability would rise.

### External debt sustainability—key baseline indicators (selected, in percent of GDP or as stated)
- External debt (nominal): 26.6 (2013); 28.0 (2014); 32.8 (2015); 41.5 (2016); 45.1 (2017); 47.7 (2018); 47.7 (2019); 46.5 (2020); 45.0 (2021); 36.7 (2016-21 Average); 24.3 (2022-2036 Average)
- Public and publicly guaranteed (PPG) external debt: 22.1 (2013); 23.6 (2014); 28.5 (2015); 37.8 (2016); 41.7 (2017); 44.7 (2018); 45.0 (2019); 44.1 (2020); 42.7 (2021); 34.1 (2016-21 Average); 21.1 (2022-2036 Average)
- Change in external debt: 5.5 (2013); 1.4 (2014); 4.8 (2015); 8.7 (2016); 3.6 (2017); 2.6 (2018); -0.1 (2019); -1.2 (2020); -1.5 (2021); -1.0 (2016-21 Average); -2.7 (2022-2036 Average)
- PV of external debt: 22.2 (2016); 28.4 (2017); 30.0 (2018); 30.8 (2019); 30.4 (2020); 29.5 (2021); 28.2 (2016-21 Average); 23.5 (2026); 18.4 (2036)
- PV of external debt in percent of exports: 128.3 (2016); 170.0 (2017); 170.5 (2018); 167.3 (2019); 162.1 (2020); 155.9 (2021); 138.4 (2016-21 Average); 115.1 (2026); 90.2 (2036)
- PV of PPG external debt: 17.9 (2016); 24.8 (2017); 26.7 (2018); 27.8 (2019); 27.7 (2020); 27.1 (2021); 26.0 (2016-21 Average); 21.0 (2026); 15.2 (2036)
- PV of PPG external debt in percent of exports: 103.4 (2016); 148.1 (2017); 151.6 (2018); 151.0 (2019); 147.9 (2020); 143.2 (2021); 127.2 (2016-21 Average); 102.8 (2026); 74.4 (2036)
- Debt service-to-exports ratio (in percent): 6.4 (2013); 8.0 (2014); 9.0 (2015); 8.4 (2016); 10.8 (2017); 13.2 (2018); 14.0 (2019); 13.3 (2020); 13.5 (2021); 13.4 (2016-21 Average); 19.2 (2036)
- Total gross financing need (Billions of U.S. dollars): 0.5 (2013); 0.6 (2014); 0.9 (2015); 1.1 (2016); 0.8 (2017); 0.7 (2018); 0.8 (2019); 0.9 (2020); 1.0 (2021); 1.5 (2026); 4.9 (2036)

### Macroeconomic assumptions underlying projections (selected)
- Real GDP growth (in percent): 4.7 (2013); 7.0 (2014); 6.9 (2015); 7.5 (2016); 1.9 (2017); 6.0 (2018); 6.0 (2019); 7.0 (2020); 7.0 (2021); 7.2 (2026); 7.5 (2036); 7.5 (2022-2036 Average)
- Growth of exports of G&S (US dollar terms, in percent): 15.5 (2013); 14.1 (2014); 5.2 (2015); 17.4 (2016); 21.9 (2017); -1.1 (2018); 8.3 (2019); 8.9 (2020); 9.2 (2021); 10.3 (2016-21 Average); 18.0 (2026); 8.9 (2036)
- Grant element of new public sector borrowing (in percent): 29.5 (2022); 48.5 (2023); 52.9 (2024); 47.2 (2025); 47.5 (2026); 51.9 (2016-21 Average); 46.2 (2026); 38.3 (2036)
- Grant-equivalent financing (in percent of GDP): 5.4 (2016-21 average entries shown); 5.0; 5.4; 4.7; 4.0; 3.9; 2.2; 0.4; 1.7 (table entries preserved as presented)

### Sensitivity analysis highlights (Table 5 and related figures)
- Baseline PV of debt-to-GDP ratio: 25 (2016); 27 (2017); 28 (2018); 28 (2019); 27 (2020); 26 (2021); 21 (2026); 15 (2036)
- Alternative scenario A1 (key variables at historical averages): PV of debt-to-GDP ratio ranges: 25, 23, 23, 23, 22, 21, 17, 18 (2016-2036 series)
- Bound test B6 (one-time 30 percent nominal depreciation in 2017) shows pronounced increases in stress metrics, e.g., PV of debt-to-GDP ratio rises to 37, 39, 39, 39 (2017-2020 entries), and PV of debt-to-revenue and other ratios spike in related panels (see table entries)
- Most extreme shocks identified in figures:
  - Figure b (PV of debt-to-GDP ratio): most extreme shock corresponds to a One-time depreciation shock.
  - Figure c (PV of debt-to-exports ratio): most extreme shock corresponds to an Exports shock.
  - Figure d (PV of debt-to-revenue ratio): most extreme shock corresponds to a One-time depreciation shock.
  - Figure e (Debt service-to-exports ratio): most extreme shock corresponds to an Exports shock.
  - Figure f (Debt service-to-revenue ratio): most extreme shock corresponds to a One-time depreciation shock.

### Recent developments on external arrears and program implication
- Overdue payments of US$3.0 million from Rwandair to Canada’s export credit agency occurred (missed payments between February-May 2016).
- Authorities acknowledged overdue obligations, proposed a revised repayment schedule to clear the arrears in early July 2016, and outlined improvements to reporting systems.
- Canadian authorities confirmed satisfaction with the revised payment schedule.
- Staff recommends a waiver of nonobservance of the continuous Quantitative Assessment Criterion (AC) on external arrears given corrective action, minor and temporary nature of the deviation, and authorities’ commitment.

### Authorities’ outlook, risks, and policy priorities
- Recent performance and outlook:
  - Real GDP growth in 2015: 6.9 percent.
  - Mining exports nearly halved due to decline in mineral prices; current account deficit deteriorated to 13.5 percent of GDP.
  - Reserves cover 3.6 months of prospective imports.
  - Real GDP growth projected to lower modestly to 6 percent in 2016 and 2017 under tightening fiscal and monetary policy, exchange rate adjustment, and efforts to address external imbalances.
- Requested policy support:
  - Request for an 18-month arrangement under the Stand-by Credit Facility (SCF) to support adjustment and bolster foreign reserves.
  - Request extension of PSI-supported program to End-December 2017.
- Policy priorities (four building blocks):
  - Boosting domestic revenue for development financing:
    - Reforms to boost domestic revenue collection and improve public financial management.
    - Identified tax policy/administration measures: rollout of a new road fund levy, an excise tax for strategic reserve, higher taxes on tobacco, changes to the mining tax regime, enhancements to e-tax, exploration of agriculture taxation model.
    - Improve state-owned enterprises oversight, tariff adjustments (water and electricity separation and tariff raise), and establishment of a Public Investment Committee.
  - Enhancing monetary policy and financial deepening:
    - Stand ready to adjust monetary policy stance; enhance transmission mechanisms.
    - Reforms to supervisory framework, draft laws to improve central bank oversight on non-bank financial institutions.
    - Reform of SACCOs, establishment of private pensions, revision of deposit insurance law to broaden financial architecture and inclusion.
  - Strengthening debt management:
    - Authorities welcome staff’s DSA that Rwanda faces a low risk of external debt distress.
    - Recent borrowing aimed at financing critical investment projects (RwandAir, Kigali Convention Center) expected to yield returns above costs.
    - Strengthen Debt Management Unit to preserve debt sustainability.
  - Diversifying the economy through structural reforms:
    - Continue export diversification strategy implemented by Rwanda Development Board (RDB); projects include KCC and RwandAir under business tourism strategy.
    - Develop ICT sector, Special Economic Zones, strengthen regional ties and EAC integration.
    - Medium-term plans: boost growth-enhancing public investment within debt sustainability limits, support private investment, reduce donor reliance, broaden tax base, enhance tax administration and compliance, and improve public spending efficiency.

*Source: IMF staff report—Supplementary information to the Fifth Review under the Policy Support Instrument and request for an SCF arrangement (June 8, 2016).*

### CONCLUSION

### CONCLUSION

### Role of the PSI
- "The PSI remains an important instrument in helping Rwanda to continue its economic progress,"
- "the authorities remain fully committed to the policies and measures therein"

### Authorities' requests and expectations
- "request an extension of the PSI through December 2017 along with two additional semi-annual reviews."
- "The authorities are confident that the combination of an extended PSI and for the granting of an SCF arrangement will appropriately support and signal their medium-term macroeconomic and growth priorities while bolstering reserves coverage and strengthening the country’s external position."

### Requested Board action
- "Accordingly, we will appreciate the Board support for the conclusion of the 5th review under the PSI, their request for extension of the PSI, and their request for an arrangement under the SCF."
- "We call on the Board to respond favorably to these requests."

*Source: _cr16153 - CONCLUSION.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16153.pdf_