REPUBLIC OF RWANDA

KIGALI, July 14, 2000

MINISTRY OF FINANCE AND
ECONOMIC PLANNING
P.O. BOX: 158
TEL: +(250) 77994 - FAX: +(250) 77581
E-MAIL: mfin@rwandatel1.rwanda1.com.

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. We recently held discussions with the Fund on the first review of Rwanda’s program for 1999/2000, which is supported by the second annual arrangement under the Poverty Reduction and Growth Facility (PRGF), approved by the Executive Board of the Fund on November 19, 1999. The discussions focused on progress made under the program and policies and actions to be pursued during the remainder of the program year, in particular to bolster revenue performance and strengthen the link between government expenditure and poverty reduction. Five of the program’s nine quantitative performance criteria for end-December 1999 were met, but the remaining four—on net foreign assets of the National Bank of Rwanda (BNR), net domestic assets of the BNR, net credit to the government from the banking system, and the primary fiscal balance—were missed, as were the two structural performance criteria—on the submission to parliament of a draft value-added tax (VAT) law, and the agreement with all commercial banks on revised restructuring plans. The 2000 budget, which was adopted at end-1999, was in line with the program targets (a condition for completion of the first review).

2. The attached memorandum of economic and financial policies (MEFP)—which updates the government’s policies set out in the government’s letter and attached memorandum of November 2, 1999—reviews progress in implementing the program and sets out the actions the government is undertaking, or has already undertaken, to reach the program targets for the remainder of the arrangement period. In particular, it describes the fiscal policies that are being implemented (and will be inscribed in the revised midyear budget for 2000) to bring the fiscal outcome in line with the original program targets for 2000. Given the nature of the nonobservance of the performance criteria and the remedial measures and commitments undertaken by the government of Rwanda as described in the MEFP, the government requests waivers for the nonobservance of the end-December 1999 performance criteria. The government also requests a modification of the performance criteria for the second review under the second-year PRGF arrangement, with September 2000 as the new test date.

3. In support of the program, the government hereby requests the second disbursement of SDR 9.52 million under the second annual arrangement, following the completion of the first review by the Fund’s Executive Board. The government understands that consideration by the Executive Board of Rwanda’s request for waivers of the above-mentioned six performance criteria and for the completion of the first review will be subject to Rwanda’s taking a wide array of prior actions—including meeting all structural performance criteria and most structural benchmarks that were to be completed by end-December 1999—as indicated in the attached MEFP; and meeting all agreed-on fiscal targets as at end-May 2000.

4. The government of Rwanda will continue to provide the Fund with such information as the Fund requires assessing Rwanda’s progress in implementing the policies described in this letter and the attached memorandum. Moreover, Rwanda will continue to consult with the Fund on its economic and financial policies, in accordance with the Fund’s policies on such consultations.

Yours sincerely,

Annex: Memorandum of economic and financial policies

Memorandum of Economic and Financial Policies of the Government of Rwanda
First Review of the Second Annual Arrangement
Under the Poverty Reduction and Growth Facility (PRGF), 1999/2000

1. Performance under the second-year PRGF program (July 1999–June 2000) has been mixed. After successfully implementing the first-year program of economic and financial reforms, the second-year program has been implemented under difficult conditions. The level of economic activity in 1999 was lower than projected, with an estimated growth in real GDP of 6 percent, compared with an original target of 8 percent (and 9.5 percent estimated for 1998). Although the agricultural and services sectors have registered some real growth, sluggish industrial output has translated into lower imports, by 13 percent in c.i.f. value terms. The period-average inflation rate—measured by the Kigali consumer price index (CPI)—is estimated to have declined from 6.8 percent in 1998 to minus 2.4 percent in 1999, reflecting continued improvements in food production and falling food prices (although this leveled off in the middle of the year), and an appropriate monetary policy of the National Bank of Rwanda (BNR). As a result of the BNR’s intervention policy, the Rwanda franc is estimated to have appreciated by about 8 percent in real effective terms in the first three quarters of 1999. However, since September 1999, the BNR has purchased more actively foreign exchange from commercial banks, thereby significantly improving its net foreign assets position during the last quarter of 1999. In nominal terms, the Rwanda franc depreciated against the U.S. dollar by almost 6 percent during 1999. As a result, at end-March 2000, the earlier real appreciation was largely reversed, the parallel market premium dropped to about 8 percent (from 14–16 percent in mid-1999), and official reserves rose to the equivalent of well over seven months of imports, c.i.f., from an already comfortable level of six months in 1998. During 1999, the terms of trade deteriorated by over 15 percent because of the fall in coffee prices and the increased costs of fuel imports.

2. Fiscal performance in 1999 fell short of the program targets, mainly as a result of difficulties in collecting revenue, and several financial targets at end-December 1999 were missed. Revenue was lower than targeted by about 1 percent of GDP (reaching 9.7 percent of GDP, compared with 10.4 percent in 1998), and nominal GDP growth in 1999 was only 3.4 percent, compared with a program figure of 7.1 percent. The revenue shortfalls reflected mainly weak customs collection (caused partly by low imports, which were also adversely affected by the introduction of new axle weight limitations in neighboring countries; partly by lower duty rates; and partly by weak administration); lower excise and income tax revenue (resulting from smaller beer and soft drink volumes, which occurred partly because the announcement in advance of the increase in excise tax rates allowed importers to build up stocks prior to the increase in early 1999); and underpayment of income taxes by large enterprises.

3. Primary expenditure was higher than targeted in 1999 because only half of the RF 5 billion of spending cuts on nonsocial, nondefense expenditure in the last quarter of 1999 agreed to offset the shortfalls in revenue were implemented, and the target for the primary deficit was missed by about 1.5 percent of GDP. Nevertheless, the authorities did not allow the tight revenue situation to interfere with social expenditures, which were RF 0.3 billion greater than programmed, even though a lack of qualified medical personnel to recruit caused underspending on health. In addition, social expenditure was defined along ministerial allocations and thus excluded many programs and activities that were social in nature but executed through ministries that were not considered to have social functions. Expenditures by these ministries nevertheless were treated as social expenditures and were, therefore, not cut, contributing significantly to the expenditure overrun.¹ Defense expenditure was contained within the budget allocation of 4.0 percent of GDP.

4. The additional deficit was largely financed by credit from the banking system, causing that target to be missed by 1.3 percent of GDP (including use of the government overdraft from the BNR of RF 6.2 billion in 1999), and also contributing to a similar overrun on the target for net domestic assets of the BNR. At the same time, however, expenditure management was improved so that the float between payment orders and payments was reduced to below the agreed target of RF 2 billion. The government was also able to set aside funds to repay all external arrears, including RF 3 billion to regularize the relationships with (and allow new project borrowing from) the European Investment Bank (EIB). As a result, the two performance criteria on domestic and external arrears were met. The performance criterion on net foreign assets of the BNR was missed by the equivalent of 0.9 percent of GDP, reflecting the BNR’s exchange policy, as well as delays in the externally financed repayment of domestic nonbank debt of the government.

5. Progress in structural reforms was broadly satisfactory and covered substantial measures in the fiscal, civil service, financial sector, trade, and public enterprise areas. However, several structural measures were taken with delays. In August 1999, the government introduced a new pricing mechanism for petroleum products, such that pump prices are revised regularly in line with developments in the world market. There was progress in the preparation of the value-added tax (VAT), but the submission of the draft VAT law to parliament (a performance criterion for end-December 1999) was delayed until end-March 2000. The new functional budget classification—including revised classifications for health and education, with stronger links between budget lines, programs, and objectives—was prepared (expected to be implemented from 2001); the preparation of a medium-term expenditure framework was initiated; and progress was made in the monitoring of social performance indicators in health and education. On civil service reform, the authorities adopted and are gradually implementing the recently adopted cadres organiques of all ministries, with a target size for each, in line with the program target of 9,500 core civil servants. In both the core civil service and education areas, staff who were previously not on the payroll (mostly unpaid teachers) were regularized, and the remaining “ghost” workers were removed; however, some problems have arisen in controlling the recruitment of new teachers. There were also delays in the adoption of a new job classification and improved incentive structures for all civil servants, as well as in the preparation of a computerized personnel management system.

6. In the financial sector, there was progress in preparing restructuring and action plans for the commercial banks; however, the agreement between the BNR and one commercial bank was concluded in April 2000, instead of at end-1999 as envisaged. Furthermore, the government and the Caisse sociale du Rwanda (CSR) reached agreement on the repayment of the development and treasury bonds, but a small part of the planned consolidation of government debt to the CSR remains to be concluded. The government also converted its consolidated debt to commercial banks (equivalent to almost 1 percent of GDP) into tradable paper.

7. In the area of trade reform, the government announced a reduction of 50 percent in the temporary import surcharges, introduced at the time of the mid-1999 review of the budget, and reaffirmed its commitment to eliminate the surcharges completely by end-July 2000.

8. With respect to public enterprise reform, the monopoly of Electrogaz over production and distribution of water, gas, and electricity has been terminated; a broad policy framework for the privatization of the nine state-owned tea factories/estates and the new, limited role for OCIR-THE was approved by cabinet; the privatization strategy for Rwandatel (the telecommunications company) was adopted; and the privatization secretariat made good progress toward the target of bringing a cumulative total (since mid-1998) of 46 public enterprises to the point of sale, with a total of 21 enterprises having been sold; 11 offered for sale; 4 brought under liquidation; and the government’s minority shares in 1 sold.

II. 2000 Macroeconomic and Fiscal Targets

9. In light of the outturn for 1999, the level of nominal GDP for 2000 has been revised downward, and accordingly the revenue and expenditure targets revised downward as well.

A. Fiscal Objectives

10. Given the severe shortfall in revenue collection in 1999, the original program revenue target for 2000 of 10.7 percent of GDP has been revised to reach an underlying revenue target of 10 ¼ percent of GDP. To achieve this, the government is resolved to taking strong measures. By end-March 2000, income tax due in 1999 from large enterprises (RF 3.9 billion) was collected retroactively. Revenue collection efforts are being strengthened through strict enforcement of existing laws, and the regulatory framework for enforcement will be revised to eliminate loopholes. At the time of the mid-2000 budget review, the government is planning to adopt reductions in current expenditure in an amount of RF 6.7 billion (just over 1 percent of GDP) vis-à-vis the original 2000 budget, so as to achieve a primary surplus of 0.1 percent of GDP, consistent with an underlying primary deficit of 0.3 percent of GDP.

11. The government has taken great pains to protect social programs, while reducing administrative expenses in social ministries. Total social spending will increase from RF 25.1 billion in 1999 to RF 27.5 billion in 2000. To the extent that external financing is available, the government will implement additional social spending programs (to be specified in the midyear revised budget for 2000). Exceptional social spending will be maintained at the original program target of about RF 13 billion, or 1.8 percent of GDP (compared with RF 8 billion, or 1.2 percent of GDP in 1999).²

12. The government has identified an amount of RF 3 billion in primary expenditure, which will be contingent upon revenue performance. Defense spending³ and the government wage bill will be contained within the program targets of RF 26 billion and RF 35 billion, respectively (3.7 percent and 4.9 percent of GDP).

13. Regarding domestic arrears, the government has strengthened the monitoring of commitments, payment orders, issuance of treasury checks, and payments by the BNR as well as monitoring of movements in nontreasury government bank accounts. The government has recently identified an amount of RF 2.2 billion in additional arrears to be paid with priority in 2000 related to the regularization of teachers, and the provision of public services for which the government has assumed responsibility. In addition, the government will prepare over the coming months an inventory of remaining recognized domestic arrears owed by the government, for which the repayment will be included in the 2001 and subsequent budgets.

14. Other financial targets would remain broadly unchanged from the program (see Section III. D below). Moreover, consistent with the primary balance target, expected external financing, and programmed domestic debt repayments, the use of credit to the government would be reduced by RF 5 billion, so as to rebuild adequate room under the overdraft (découvert) facility from the BNR.

III. Policies for the Remainder of 2000

15. In view of the considerable fiscal slippages and delays in reforms in 1999, the government is undertaking strong corrective actions in key areas of economic management, a number of which have already been implemented. As a result of the government’s prompt measures in the revenue and expenditure area during the first months of 2000, the financial targets for end-March 2000—which are in line with the revised program targets for 2000—were broadly attained.

A. Fiscal Policies

Revenue

16. The government recognizes that structural deficiencies within the Rwanda Revenue Authority (RRA) are deeper than previously recognized. Achieving fiscal sustainability will therefore take longer than originally envisaged. Accordingly, to improve revenue performance, an action plan for the RRA has been developed and is being implemented with technical assistance from the U.K. Department for International Development (DFID). To ensure better coordination and flow of information, the respective roles and responsibilities of the Ministry of Finance, the RRA Board, and RRA management will be clarified by end-September 2000. Corporate planning for the RRA will be improved, including through the use of revenue targets for different departments, the implementation of performance management and a review of incentives for personnel, and monthly reports on revenue performance. The implementation of the RRA action plan will help the government to achieve a revenue-to-GDP ratio of 10.7 percent of GDP in 2000. Specific measures to be emphasized in the action plan are detailed in the table below:

Expenditure

17. The government intends to reduce expenditures to achieve savings of RF 6.7 billion vis-à-vis the original 2000 budget while protecting social programs. The government has also identified an amount of RF 3 billion in nonpriority expenditure, the disbursement of which would be contingent upon satisfactory revenue performance. These savings will be inscribed in the revised mid-2000 budget (end-June 2000), and contingency measures will be identified and inscribed in a supplementary budget, as follows:

• Budget lines where reductions are being made include goods and services (RF 3.1 billion), transfers (RF 0.9 billion), and domestically financed capital expenditure (RF 2.7 billion).

• Budget lines where expenditures would be contingent upon revenue performance include official travel, repairs and maintenance of administrative buildings and vehicles, internal training programs, and investment programs for some semiautonomous bodies and higher education institutions.

B. Reforms in Budget Preparation

18. To ensure efficiency and adequate monitoring of budget operations, actions will be undertaken according to the schedule indicated below.

C. Public Accounts Management

19. The government intends to take measures, as indicated in the table below, to accelerate the preparation and publication of audited public accounts.

Actions	Date
To improve public accounts preparation:
Prepare the public accounts (reddition des comptes) for 1999 (excluding government assets other than cash) and submit them to the Cour des Comptes; complete quarterly public accounts, with a four-month delay, starting with the second quarter of 2000.	End-June, 2000
To improve the regulatory framework of the public accounts:
Submit the draft law on public accounts to parliament and prepare the related ministerial decree on public accounts.	End-August 2000
To enhance the effectiveness of the Auditor-General:
Initiate the audits of the 1999 accounts of the Ministries of Public Works, Transport, and Communication; Energy, Water, and Natural Resources; Defense; Health; and Education.	End-May 2000 Prior action
Complete the audits of the 1999 accounts of the Ministries of Public Works, Transport, and Communication; Energy, Water, and Natural Resources; Defense; Health; and Education.	End-October 2000
To sign agreements with five public enterprises1 on the settlement of cross debt (covering tax arrears before 1998, retroceded debt, and government debt/arrears to these enterprises), including a schedule for repayment. (The proceeds of these repayments will be treated outside the primary balance.)	April 30, 2000 Prior action
1 Electrogaz, Ocirthé, Rwandatel, Copimar, and ONP. The agreement with a sixth enterprise, Sinelec, is expected to be signed over the coming months.

D. Monetary and Exchange Rate Policies

20. To ensure continued financial stability, the BNR will aim to maintain inflation at or below 3 percent, allow the exchange rate to be market determined, and accelerate the reforms of the financial sector. The annual and quarterly monetary targets for 2000 would be revised slightly from the original program targets (see Table 1). The policies to be implemented in this area include the following:

• continuing to adhere to a policy of targeting reserve money growth; in view of the excess liquidity at end-1999, base money would be targeted at RF 39.7 billion at end-2000, consistent with broad money growth of 8.2 percent;

• adhering to the policy stance that the exchange rate be market determined, while intervening only to meet the net foreign assets target and to smooth out short-term disturbances;

• undertaking money market interventions when needed to achieve the above-mentioned objectives; and

• abstaining from introducing any further controls on foreign exchange transactions, in line with the objective of gradually liberalizing the capital account.

E. Financial Sector Reforms

21. To further improve the health of the financial system, the BNR is undertaking the actions indicated in the table below.

F. Other Structural Policies

22. In view of the recent delays in several structural reforms, the government intends to take the actions indicated in the table below.

G. Financing

23. The external financing requirement of the program for 2000, estimated at about US$100 million (after obtained or expected rescheduling/refinancing), is expected to be fully met by disbursements under existing adjustment operations from the World Bank (about one-third) and EU (about two-fifths), and bilateral donor disbursements (including through the Multilateral Debt Trust Fund). The government will continue to seek rescheduling agreements with the remaining non-Paris Club creditors on terms at least as favorable as Naples terms. In view of possible debt relief under the Initiative for Heavily Indebted Countries (HIPC Initiative), it has initiated the reconciliation of external debt data with creditors, including through sending letters to creditors.

H. Program Monitoring and Coordination

24. The government is aware that there is considerable scope for improving monitoring and coordination of the reform program, as well as for strengthening the collection, reconciliation, and reporting of data. It is also important to establish the institutional framework for preparing the government’s poverty reduction strategy. To this end, the membership of the Interministerial Committee in charge of policy coordination has been enlarged to include the Ministries of Health; Education; Public Works, Transport and Communication; Energy, Water, and Natural Resources; Local Government and Social Affairs; Lands, Human Resettlement, and Environment Protection; and Gender and Women in Development. The committee has been placed under the chairmanship of the Prime Minister—with the Minister of Finance as Vice-Chairman—and its mandate has been extended to cover the poverty reduction strategy. The Interministerial Technical Committee has been correspondingly enlarged. It will have a permanent secretariat in the Ministry of Finance and Economic Planning and be staffed with full-time personnel. Focal points in key ministries were set up by end-May 2000. The government is requesting technical and financial support from development partners for this unit.

I. Prior Actions, Performance Criteria, Benchmarks, and Reviews

25. The government is requesting waivers for the two missed structural performance criteria and the four missed quantitative performance criteria. To justify these waivers, the government has taken a number of remedial measures and strengthened its efforts to implement the program. It has tightened its fiscal and monetary policies to allow it to meet the revised quantitative targets for end-May 2000. In addition, it has taken all structural measures that were structural performance criteria at end-December 1999; in particular, the VAT tax law was submitted to parliament at end-March 2000. Furthermore, the government is implementing measures to accelerate structural reforms, in particular, the strengthening of the Auditor-General’s office and of the RRA action plan.

26. The measures indicated above that are marked “prior action” will be prior actions for the completion of the first review. Furthermore, meeting the revised monthly fiscal targets through end-May 2000 will be a prior action for completion of the first review. The proposed modified quantitative and structural performance criteria for end-September 2000 for the second review and the quantitative and structural benchmarks for the remainder of the second annual PRGF arrangement are included in Tables 1 and 2. The second review is to be completed not later than November 15, 2000.