IMF Staff Completes Review Mission to Rwanda

IMF News, May 6, 2021

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IMF mission led by Haimanot Teferra held virtual meetings with Rwandan authorities during March 22 – May 6, 2021 to discuss the fourth review of Rwanda’s Policy Coordination Instrument (PCI)-supported program.
Staff-level agreement was reached on policies needed to complete the fourth review under the PCI. The successful completion of the review is subject to approval by the IMF Executive Board.
Consideration by the Board is tentatively scheduled for end-June 2021.
The authorities have requested a one-year extension of the PCI program.

Economic activity contracted by 3.4 percent in 2020 due to the COVID-19 pandemic.
Growth is projected to rebound to 5.1 percent in 2021.
The rebound is supported by:
- the national vaccination campaign targeting 60 percent of the population by end-June 2022, and
- continued government support to hard-hit businesses and vulnerable households.
Downside risks to growth remain substantial owing to uncertainties about the duration and impact of the pandemic, and the availability of vaccines.

The fiscal deficit in the first half of FY20/21 was larger than anticipated, owing to:
- accelerated execution of schools construction, and
- timing of budget support disbursements,

despite revenue overperformance.

The fiscal deficit in the current and next two budget years is projected to widen further owing to increased spending needs to:
- accommodate the COVID-19 vaccine rollout,
- hire new teachers to minimize scarring from human capital loss, and
- provide support to the private sector and state-owned enterprises.
Public and publicly-guaranteed debt is projected to increase to just over 80 percent of GDP by 2022, from 71.3 percent at end-2020.
Rwanda’s risk of debt distress is expected to remain moderate, but risks have heightened and buffers to cushion the impact of external shocks have diminished.
Policy objective: bring debt to the anchor of 65 percent of GDP within a reasonable timeframe through credible revenue and spending measures and a growth-friendly fiscal consolidation once the crisis abates.

Headline inflation reached 2 percent year-on-year in March, mainly driven by the decline in food prices, and is expected to remain subdued in the next quarters.
The current account deficit widened in 2020.
Gross international reserves stood at 6 months of prospective imports.

The banking system continues to be stable, liquid, and well capitalized.
The pandemic has contributed to the buildup of credit risk.
Recommendations to contain financial sector vulnerabilities include intensified monitoring of credit risk and prudent loan classification and provisioning.

Program performance has been strong: all end-December 2020 quantitative targets met and all except one reform targets observed.
Structural reforms need to be fast-tracked to mitigate risks exacerbated by the pandemic. Key reform areas include:
- strengthen fiscal risk management to foster inclusive growth and mitigate debt-related risks,
- bolster domestic revenue mobilization under Rwanda’s Medium-Term Revenue Strategy,
- rationalize spending and ensure the quality of public investment,
- strengthen management of fiscal risks, including from state-owned enterprises, public-private partnerships, and government loan guarantees,
- deepen financial markets, sustain the expansion of digital payments, and further financial inclusion to fast-track private sector development.

Strike a balance between sustaining the economic recovery and maintaining fiscal responsibility given:
- the deteriorated fiscal and debt outlook,
- uncertainty about the pace of the recovery, and
- Rwanda’s history of frequent macroeconomic shocks.
Support the recovery with policy action now, to be complemented by growth-friendly fiscal consolidation and credible revenue and spending measures once the crisis abates.
Allow sufficient time to identify fiscal measures; authorities requested a one-year PCI extension to facilitate this.

IMF Staff Completes Review Mission to Rwanda, May 6, 2021.