Press Release No. 10/247

Press Release No. 10/247
June 17, 2010

The Executive Board of the International Monetary Fund (IMF) has approved a new three-year Policy Support Instrument (PSI) for Rwanda. The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring, and endorsement of their policies. (see Public Information Notice No. 05/145).

The PSI for Rwanda aims to consolidate macroeconomic stability, achieve sustained broad-based growth, while reducing Rwanda’s aid dependency. The authorities’ program is designed to achieve these objectives by maintaining a sustainable fiscal position; strengthening monetary and exchange rate policies; and supporting growth with structural reforms to diversify the export base and improve the business environment.

Following the Executive Board’s discussion of Rwanda on June 16, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

“Rwanda has achieved high growth and macroeconomic stability under three successive IMF arrangements. Inflation, though volatile, is now in single digits, international reserves are at comfortable levels, and external debt has been reduced significantly thanks to prudent policies and substantial debt relief.

“Rwanda is making a transition to a new three-year Policy Support Instrument, the natural progression following a successful stabilization program, and given the lack of need for IMF financial support at this time. The macroeconomic priorities and structural reforms in the new program focus on preserving macroeconomic stability, consistent with the authorities’ poverty reduction and growth strategy (the EDPRS), while addressing vulnerabilities arising from low levels of fiscal revenues, a narrow export base, high aid dependence and volatile inflation.

“Growth is underpinned by sound macroeconomic policies, higher investment and commitment to implement a vigorous structural reform agenda. Fiscal reforms focus on enhancing spending efficiency through reforms in public financial management and increasing domestic revenues. Limited use of non-concessional borrowing will allow for scaling up of critical growth-enhancing investments without worsening debt vulnerabilities. Measures to address shortages of skilled labor, expand the export base, and further remove key bottlenecks to doing business are expected to enhance growth acceleration and poverty reduction.

“Financial sector reforms, including building supervisory capacity and improving liquidity management, will further support growth and enhance the effectiveness of monetary policy. In particular, low and stable inflation is expected to remain anchored on the authorities’ commitment to greater exchange rate flexibility as well as effective use of available monetary policy instruments”, Mr. Portugal added.

ANNEX

Recent Economic Developments

Growth in Rwanda slowed sharply in 2009 to about 4 percent after growing by 11.2 percent in 2008, as a result of declining commodity prices following the global economic crisis and tight domestic liquidity conditions. Inflation also declined significantly from 22.3 percent in December 2008 to 5.7 percent in December 2009, and further to 3 percent in April 2010, reflecting lower food prices and the slowdown in economic activity.

The medium-term outlook looks favorable and reflects a gradual recovery after the slowdown in 2009. Growth is expected to average 6 percent in 2010-13 supported mainly by the government’s investment strategy aimed at alleviating critical infrastructure constraints to exports of goods and services and further enhancing competitiveness. Rwanda will need strong policies that preserve fiscal sustainability and deliver low and stable inflation, and growth-enhancing structural reforms aimed at deepening the financial sector, diversifying export base, and improving the business environment.

Program Summary

Rwanda’s PSI will support the government’s program to achieve sustainable broad-based high growth and poverty reduction, in line with the objectives outlined in the government’s EDPRS. Fiscal policy will focus on increasing revenue mobilization aimed at reducing Rwanda’s aid dependence. Domestic revenue is targeted to increase by 2 percent of GDP over the PSI period, backed up by significant revenue administration reforms. Monetary policy will aim at achieving a 7 percent inflation at end-2010, taking into account expected rise in oil prices, and stabilizing at 5 percent over the medium term. This will be supported by a shift towards greater exchange rate flexibility and a more active interbank market, while at the same time maintaining a comfortable level of international reserves that cushion against exogenous shocks. Financial sector reforms, including building supervisory capacity and improving liquidity management, should support growth and enhance the effectiveness of monetary policy.

Rwanda: Selected Economic and Financial Indicators, 2008–15
	2008	2009	2010	2011	2012	2013	2014	2015
	Act.	Est.	Proj.	Proj.	Proj.	Proj.	Proj.	Proj.
GDP and Prices (percent change)
Real GDP growth	11.2	4.1	5.4	5.9	6.4	6.9	6.5	6.5
Real GDP (per capita)	8.9	2.0	3.2	3.7	4.2	4.7	4.3	4.4
Consumer prices (period average)	15.4	10.4	6.4	6.5	5.5	5.0	5.0	5.0
Consumer prices (end of period)	22.3	5.7	7.0	6.0	5.0	5.0	5.0	5.0
External sector (percent change)
Terms of trade (deterioration = -)	-1.4	-9.9	2.9	-2.8	-2.2	-2.3	-0.9	1.1
Real effective exchange rate (end of period; depreciation-)	22.3	1.4	...	...	...	...	...	...
Money and credit1 (percent change)
Broad money (M2)	24.2	13.1	12.4	12.3	12.3	12.3	12.3	12.3
Domestic credit2	20.5	3.8	11.0	11.4	13.7	12.6	10.5	10.2
Credit to the central government2	-18.1	-0.4	-2.5	0.0	0.0	0.0	0.0	0.0
Credit to the economy2	38.6	4.2	13.5	11.4	13.7	12.6	10.5	10.2
Savings and investment gap (percent of GDP)	-14.4	-17.3	-19.3	-18.6	-14.8	-12.9	-11.6	-10.6
Gross domestic investment	23.5	21.3	22.8	22.7	21.5	20.8	20.4	20.3
Public	10.4	10.0	11.1	10.7	9.4	8.6	8.1	7.7
Private	13.1	11.3	11.7	12.0	12.1	12.2	12.3	12.6
National savings (excluding grants)	9.1	4.0	3.5	4.1	6.6	7.8	8.9	9.7
Public	0.0	-2.7	-3.4	-2.1	-2.3	-1.4	-1.0	-0.5
Private	9.2	6.7	6.9	6.2	9.0	9.2	9.8	10.1
External sector (percent of GDP)
Current account balance (including grants)	-4.9	-7.3	-7.9	-8.8	-5.4	-4.4	-3.7	-3.5
Current account balance (excluding grants)	-14.4	-17.3	-19.3	-18.6	-14.8	-12.9	-11.6	-10.6
External debt (end of period)	14.4	14.4	16.4	19.3	19.1	18.0	16.7	15.4
Scheduled debt-service ratio3	1.3	1.8	3.0	6.3	6.9	7.8	7.4	6.7
Government budget and debt (percent of GDP)
Revenue	14.9	12.8	12.8	13.3	13.8	14.2	14.6	14.8
Grants	10.9	11.7	13.5	11.3	10.7	9.6	8.7	7.8
Total expenditure and net lending	25.3	25.5	27.3	26.1	25.5	24.2	23.7	23.0
Overall balace (including grants)	0.4	-0.9	-1.0	-1.5	-1.0	-0.4	-0.4	-0.3
Overall balace (excluding grants)	-10.5	-12.6	-14.5	-12.8	-11.7	-10.0	-9.1	-8.2
Stock of domestic debt	11.8	6.8	7.7	...	...	...	...	...
Memorandum item:
Nominal GDP (billions of Rwanda Francs)	2,565	2,964	3,333	3,746	4,210	4,725	5,285	5,912
Average exchange rate (Rwanda Franc / US$)	547	565	586	612	633	652	672	692
Average treasury bill yeild (percent)	6.9	8.7	...	...	...	...	...	...
Overall balance of payments (US$ millions)	65	139	4	-43	10	1	32	40
Gross reserves (in months of imports of goods and services)4	4.8	5.1	4.8	4.7	4.7	4.4	4.3	4.2
Sources: Rwandan authorities; and IMF staff estimates and projections. 1 Projections are based on the program exchange rate of RwF per US dollar of of 571.24. 2 As a percent of the beginning-of-period stock of broad money. 3 As a percent of exports of goods and services. 4 Data from 2009 onwards includes SDR Allocation.