Public Information Notice No. 98/65

Public Information Notice: IMF Concludes Article IV Consultation with Rwanda

September 1, 1998

On June 24, 1998, the Executive Board concluded the Article IV consultation with Rwanda¹.The Board also approved a three–year loan for Rwanda under the Enhanced Structural Adjustment Facility (ESAF), in an amount equivalent to SDR71.40 million (about US$94.2 million). The first annual loan, equivalent to SDR23.80 million (about US$31.4 million), is available in two equal semiannual installments, the first of which is available immediately.

Background

Since the end of the war and genocide in 1994, Rwanda has made substantial progress in rebuilding the country’s economic and social infrastructure. Economic activity has recovered at a strong pace and real GDP, after growing at 11 percent in 1997 and reaching 85 percent of its pre-war level, is expected to increase by 7 percent in 1998. Inflation has been brought down to about 10 percent in 1996–97, and is expected to fall further in 1998. The exchange rate of the Rwanda franc has remained stable since early 1995, while the stock of official foreign reserves has been increasing steadily to the equivalent of 5 months of imports at end–1997, reflecting large aid inflows and the partial recovery of the export base.

The fiscal situation improved markedly in 1996–97 owing mainly to the implementation of tax measures and improvements in tax administration. Some progress was made in strengthening expenditure control and reducing the share of security–related expenditure. The implementation of the public investment program was below the projected level owing to capacity constraints. As a result of these developments, the fiscal deficit (excluding grants) declined from 13 percent of GDP in 1995-96 to just under 10 percent in 1997. The government’s efforts in 1998 and beyond focus on: (i) further improving revenue mobilization, in particular through the recently established Rwanda Revenue Authority, while reducing trade taxes; and (ii) strengthening expenditure management and prioritization with a significant shift toward expenditure on health and education.

The government is implementing a broad–based structural reform program, to be supported by efforts to improve governance and consolidate national reconciliation. The reform program will focus on: improving the quality of, and incentive structure for, the civil service; offering for sale all remaining public enterprises, including key public utilities and the coffee and tea sectors, before end–1999; further reducing tariffs so as to comply with the objectives of the Cross–Border Initiative from 1999; and restructuring three smaller banks (the two largest banks have already been restructured).

The government’s strategy to reduce poverty, the incidence of which is estimated to have worsened to 70 percent of households in recent years, has four main elements: (i) improvement in the quality and accessibility of basic health and education services; (ii) improvement in agricultural productivity through the promotion of markets for inputs and products, the facilitation of rural credit schemes, and the adoption of a land reform law providing for security of land tenure; (iii) expansion of the coffee and tea sectors through progressive liberalization and privatization; and (iv) implementation of targeted poverty alleviation programs and special assistance programs for victims of genocide.

Executive Board Assessment

Executive Directors commended the Rwandese authorities for the progress made under the IMF staff-monitored program for 1997, including the implementation of prudent financial policies, improvements in administrative and institutional capacity, the rehabilitation of some of the country’s economic and social infrastructure, and the resettlement of returned refugees and displaced persons. At the same time, they noted Rwanda’s need to continue strengthening its administrative and institutional capacity, to increase budget allocations for social and other nonmilitary purposes, and to raise the low levels of domestic savings and investment. Directors underscored the importance of accelerating structural reforms to lay the foundation for durable national reconciliation, high and sustainable economic growth, and poverty reduction. In this regard, they welcomed the authorities’ commitment to economic and social reform under the new ESAF-supported program.

Directors commended the authorities’ commitment to fiscal sustainability through improvements in tax administration, expenditure prioritization, and budget and treasury management. They welcomed the recent adjustment in the sales tax and the establishment of the Rwanda Revenue Authority, and stressed the importance of vigorous implementation of reforms to improve tax and customs administration, as well as of adequate preparations for the introduction of a value-added tax.

Directors welcomed the authorities’ decision to postpone an increase in government wages until after the completion of the ongoing civil service reform, which is a prerequisite for the development of an efficient and better paid civil service. They welcomed the significant increase in expenditure on health and education, albeit from the current very low levels, but stressed that a further shift of unproductive expenditure, including military outlays, to expenditure on human resource development was essential. In this context, Directors encouraged the authorities to establish a plan for the reduction in military expenditure, which should include on-budget as well as off-budget items. Directors concurred with the authorities’ plan to reexamine the budget allocations for 1999 and beyond, taking into account the outcome of the scheduled public expenditure review of the education and health sectors, the prospective amounts of external budgetary support that could be mobilized on a sustainable basis, and the program’s macroeconomic objectives. Directors also noted the exceptional social expenditure to cover the costs of assisting the victims of genocide, demobilization and reintegration, civil service reform, reintegration of refugees, and the establishment of governance institutions. They underscored that a speedy implementation of these programs was crucial for enhancing national reconciliation. Directors also noted the crucial role played by donors in supporting these efforts by Rwanda, while acknowledging the problems attributable to weak implementation capacity.

Directors welcomed the recent progress in strengthening budget and treasury management, and encouraged the authorities to further reinforce these efforts with a view to enhancing transparency and control. In this context, Directors supported the authorities’ efforts to improve governance in fiscal and other areas, and noted that such efforts needed to be supplemented by the provision of timely technical assistance from donors.

Directors noted the recent improvement in the conduct of monetary policy with the establishment of an interbank money market. They encouraged the authorities to monitor monetary conditions closely and to proceed quickly with the issuance of treasury bills, which would enhance the flexibility of monetary policy instruments. They also emphasized the need to speed up the adoption of the revised banking law, which would strengthen the ability of the central bank to adequately supervise the financial system. Directors welcomed the authorities’ commitment to maintain a market-determined exchange rate and their intention to accept in the very near future the obligations of Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement.

With regard to structural reforms, Directors stressed that high priority should be given to accelerating civil service reform. In this context, they encouraged the authorities to proceed quickly with the removal of "ghost workers" from the civil service roster, the replacement of underqualified civil servants with more qualified ones, and the introduction of a revised wage and incentive structure. They also noted the importance of transparent procedures to monitor and control recruitment. Directors welcomed the authorities’ commitment to offer for sale the remaining public enterprises during 1998-99, with priority to be given to public utilities and the coffee and tea sectors. In this regard, they emphasized the importance of strengthening the capacity of the privatization unit within the Ministry of Finance, and of ensuring the transparency of the privatization program. Directors welcomed the recent steps to liberalize foreign trade, and encouraged the authorities to further reduce tariffs and eliminate intra-regional trade barriers inline with the Cross-Border Initiative. They welcomed the envisaged establishment of an Investment Promotion Agency, but underscored the importance of minimizing tax exemptions and concessions.

Directors noted that Rwanda’s balance of payments situation would remain under pressure over the medium term, in view of the country’s weak export base, continued high import needs, and heavy debt-service obligations. They observed that the ratio of net present value of debt-to-exports was expected to remain above 400 percent in the medium term after the full use of traditional debt relief mechanisms. Directors emphasized the importance of a sustained commitment to strong macroeconomic policies and structural reforms to improve the prospects for mobilizing the required amounts of donor support on highly concessional terms and on a sustained basis over the long run.