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Rwanda and the IMF Press Release: IMF Completes Review Under Rwanda's PRGF Arrangement and Approves US$0.810 Million Disbursement June 16, 2003 Country's Policy Intentions Documents |  | |
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Rwanda—Letter
of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum
of Understanding
Mr. Horst Köhler Dear Mr. Köhler, 1. Faced with extraordinary challenges, Rwanda has taken significant, if initial, strides toward erecting the foundations for a future in which poverty will be eliminated. It is a future in which the concerted efforts of an educated and healthy citizenry will substantially and progressively improve national welfare and contribute to the peace and well being of our region. 2. We are now engaged in an historic social and economic transformation. A national referendum on the new constitution was held on May 26, 2003; it was overwhelmingly endorsed by the population and is set to consolidate Rwanda as a fully fledged plural democracy, with a guarantee of equal rights for all, a commitment to justice and social harmony, and a dedication to removing the vestiges of sectarianism that gave rise to the 1994 genocide. 3. In concert with the new constitution, multi-party elections will be held for the legislature and presidency during 2003. In striving to move forward with the process of reconciliation the hearing of cases against those accused of complicity in the 1994 will be expedited through the wide-scale implementation of the Gacaca traditional judicial process. In moving forward on this, about 40,000 of the accused were released during January 2003. 4. The unilateral withdrawal of our armed forces from the Democratic Republic of Congo in October 2002 demonstrated our commitment to peace in the Great Lakes Region. In the months ahead we will continue with a program of demobilization and reintegration, supported by the international community. This will free resources for poverty reduction, reduce economic uncertainty and improve prospects for economic development. Rwanda fully recognizes the critical role of a sound macroeconomy in achieving its economic and social objectives. The PRSP issued in June 2002 and the PRGF approved by the International Monetary Fund's Executive Board in August 2002, set out clear economic and financial objectives as well as the Government's policies for their achievement. In the period since, we have worked conscientiously and steadily toward the implementation of these policies. 5. The attached memorandum of economic and financial policies (MEFP) reviews the implementation of the 2002 program and sets out the objectives and policies that the government intends to pursue in 2003. 6. In light of the progress achieved in the implementation of the program for 2002, and given the supporting details provided in the MEFP, the Government of Rwanda requests a waiver for the missed observance of the performance criteria for end-December 2002 on the domestic fiscal balance, the net accumulation of domestic arrears, and the accumulation of external arrears. The Government also requests a second disbursement under its PRGF arrangement with the Fund in an amount equivalent to SDR 571 thousand, following completion of the first review and the approval of the second annual arrangement by the Fund's Executive Board. 7. The Government of Rwanda will continue to provide the IMF with such information as the Fund requires to assess Rwanda's progress in implementing the policies described in this letter and the accompanying MEFP. In addition, the Government will continue to consult with the Fund on its economic and financial policies, in accord with the Fund's policies and practices on such consultations. Yours sincerely,
Attachments: Memorandum of Economic and Financial Policies |
I. Performance Under the 2002 Program 1. Performance, during 2002, under the first annual PRGF arrangement was broadly satisfactory. Real GDP growth in 2002 is estimated to have expanded by 9.4 percent, reflecting an exceptional harvest in subsistence crops and a boom in construction that more than offset a decline in the growth rate for agricultural exports and manufacturing.1 As a result of rising prices for locally produced goods, the effects of rising world market prices for petroleum products and, beginning at midyear, the pass through of the accelerated depreciation of the Rwanda franc (see paragraph 8), the consumer price index at end-2002 was 6.2 percent, 3 percentage points above target. With this, year-average inflation amounted to 2.0 percent. 2. Substantial progress was achieved toward the fiscal objectives under the 2002 program. Domestic revenue increased by 0.8 percentage points (to 12.2 percent of GDP), following the increase of the VAT rate from 15 percent to 18 percent and realignment of import tariff bands in July 2002, and the full implementation of tax stamps for cigarettes during the third quarter of 2002. Revenue performance was also aided by improved collections on profit taxes, including tax arrears. With regular domestic expenditures held within programmed limits, the deficit on the domestic fiscal balance was held to RF 34.8 billion (4.2 percent of GDP), which would have met the adjusted performance criterion for the domestic fiscal balance (see Table 2) in the absence of unanticipated outlays for the withdrawal of troops from the Democratic Republic of the Congo ("DRC", paragraph 3). The performance criterion for recurrent priority spending was met and recurrent defense spending (excluding the withdrawal) was held to 2.9 percent of GDP, down from 3.3 percent in 2001. While the settlement of pre-2002 domestic arrears substantially exceeded the programmed value for end-December 2002, the performance criterion on the net reduction of domestic arrears was missed by 0.5 percent of GDP as the stock of bills payable for 2002 increased substantially, in part, reflecting delays in the disbursement of external assistance. 3. During September-October 2002, the 38 battalions (about 23,000 soldiers) of the Rwandese armed forces stationed in the Democratic Republic of the Congo (DRC) were repositioned within the national borders, fully meeting Rwanda's obligations under an agreement reached with the DRC government in July 2002. The cost of the withdrawal and directly related establishment of new defense facilities entailed an unanticipated expenditure of RF 10.9 billion, largely for air evacuation, fuel, power generating equipment and camp infrastructure. Despite the extremely tight calendar for the completion of this exercise, the goods and services used were procured through the Military Tender Board and fully documented, with outlays fully accounted in the government's financial information system. 4. Despite continuing efforts to strengthen the administration of the foreign-financed development budget (CEPEX), data on the implementation of foreign-financed development expenditures for 2002 have not yet been compiled. Based on implementation of the development program in line with the budget, the total deficit amounted to 11 percent of GDP before grants, or 2.4 percent of GDP including grants. 5. In December 2002, the National Assembly approved the 2003 budget in conformance with the structural performance criterion set for end-December 2002. In particular, the 2003 budget introduced an excise tax on cars, reformed the law on professional remuneration tax (TPR), making salary and other allowances in cash and kind fully taxable under the TPR, and returned the excise tax rate for beer to 57 percent. 6. The implementation of monetary policy during 2002 was complicated by a larger-than-programmed expansion of credit to government during some parts of the year and the continued weak state of the commercial banking sector (paragraphs 13 and 14).2 As the annual growth rate of broad money rose from 5.7 percent in June 2002 to a peak of 15.7 percent in October (the September reserve money benchmark was missed by 13 percent), the NBR acted to tighten liquidity conditions through open market operations. As a result, the interest rates on treasury bills and the central bank intervention rate rose from 9.7 percent in mid-September to 10 ½ percent at end-November 2002 and remained at that level for the rest of 2002. As action was taken to reduce bank reserves, commercial bank holdings of government securities increased substantially during this period, and the performance criterion for reserve money at end-December 2002 was met. 7. Despite the reining in of reserve money, monetary conditions remained overly liquid at end-2002. The net foreign assets of the National Bank of Rwanda (NBR) rose to RF 72.6 billion (US$142 million) at end-December, exceeding the adjusted program floor by RF 1.7 billion (2.7 percent).3 Net credit to government from the banking system, totaling RF 0.9 billion at end-December 2002, met the performance criterion under the program despite the unexpected outlays for troop withdrawals. Nonetheless, credit to the economy grew by 14.3 percent—more than a full percentage point above the targeted level. As a result, broad money grew by 12.4 percent (on an annual basis) during 2002—5.5 percentage points above target, evaluated at current exchange rates. 8. The stronger-than-targeted expansion in monetary aggregates, along with weak export performance (see below) contributed to growing pressure in the foreign exchange market during the second half of 2002. The Rwanda franc/US$ exchange rate, which had depreciated by 2.6 percent during the first half of 2002, weakened by 8.8 percent between mid-July and end-December 2002, notwithstanding an increase in the amount of foreign exchange offered by the central bank in its weekly auctions. 9. In the external sector, merchandise exports declined significantly, largely as a result of a drop in international prices. Despite a small decline in imports, the external current account deficit deteriorated by 1.3 percent of GDP to 17.2 percent.4. This deficit was financed by grants and loans, as well as bilateral rescheduling. The net foreign assets of the NBR at end-December 2002 totaled US$142 million—an increase of about US$30 million from end-2001. 10. During the course of 2002, Rwanda accumulated small amounts of external arrears to the African Development Fund, in violation of the continuous performance criterion on the nonaccumulation of (nonrescheduable) external arrears. In order to address avoid a repetition of these developments, which resulted from an administrative error, an action plan has been developed for strengthening the management of external debt service. In this regard, external debt payment procedures will be reviewed in order to streamline and enhance monitoring along the different stages of debt payment, including the authorization and execution of payments. 11. Rwanda's external debt amounted to US$ 1.4 billion (81 percent of GDP) at end-2002. Given the heavy debt service burden associated with this stock, Rwanda continues to depend on interim debt relief from its creditors. In this regard, Paris Club creditors, in October 2002, decided to extend the consolidation period from May 1, 2002 to June 30, 2003 on the basis of Cologne terms. In addition, discussions are underway with Paris Club creditors for the signing of bilateral agreements under the previous rescheduling. The Paris Club has been requested to extend the deadline for reaching bilateral agreements under that rescheduling to May 31, 2003. Rwanda is also making efforts to reach rescheduling agreements with its non-Paris Club creditors. An agreement with the Kuwait Fund was signed on February 5, 2003, rescheduling the stock of debt including arrears. 12. There has been progress in carrying out the agenda of structural measures adopted under the program. In the area of privatization, a five-year management contract for the electricity and gas parastatal, Electrogaz, was agreed in March 2003. Financial advisers have been engaged to prepare for the sale of the public telecommunications company, Rwandatel, with its offer for sale slated for December 2003. With respect to the tea-processor, Sorwathe, the government offered for sale 13.4 percent of its share to a private investor and a further 10 percent to a farmer's association. Two state-owned tea estates will be offered for sale by end-August 2003 following the adoption of enabling legislation by the National Assembly, and the privatization of three rice processors, and mining, printing, hotel, and livestock enterprises are targeted by end-2003. 13. Substantial steps have been taken toward addressing problems in Rwanda's financial sector. With respect to the Banque Commerciale du Rwanda (BCR), following the approval of a restructuring plan by the bank's board of directors in August 2002 (a structural benchmark for end-September 2002), actions were taken to substantially reduce operating costs, enabling the bank to realize small operating surpluses in the ensuing months. BCR's external reference shareholder has been formally asked to participate in BCR's recapitalization,5 and an action plan has been decided that will lead to the offer for sale of the bank by end-June 2003. 14. NBR bank supervisors conducted full audits of three banks during the second half of 2002 (a structural benchmark for end-December 2002). The NBR placed restrictions on the operations of two commercial banks based on audit findings and increased ongoing supervision.6 In addition, the scope of NBR's bank supervision was extended to microfinance operations following the establishment of a Micro-Finance Supervision Unit in December, 2002. Accelerated loan recovery procedures (voie parée) were reinstated and associated administrative constraints were resolved. As a result, loan recovery performance and discipline in the financing sector improved substantially during 2002. The stock of nonperforming loans decreased by 5.9 percentage points between end-2001 and end-2002, and the rate of provisioning increased from 34.4 percent to 60.4 percent over that same period.7 In addition, in November 2002, the Banker's Association agreed on an information sharing arrangement under which a consolidated list of defaulting borrowers is circulated to Rwanda's commercial banks. A tender for a financial sector study aimed at improving the performance of the financial sector and at developing capital markets, and addressing the management of nonperforming loans, a structural benchmark for end-July 2002, was issued in November 2002, as a result of administrative delays, partly related to the World Bank tender procedures. On the basis of the tender an expert to implement the study was selected in April, 2003. 15. New organigrams for civil servants in central government line ministries have been established and are in the process of implementation. As a result two ministries have been combined and the functions of others have been realigned. About 500 staff have been redeployed, including from central government to newly decentralized units of government. Following approval by Cabinet, a prime ministerial decree supporting a new legal framework for the operations of the National Tender Board was issued on October 30, 2002. Following the gazetting of the Prime Minister's decree establishing the National Tender Board (NTB) on April 1, 2003, the NTB was formally established. The Arbitration Center has been strengthened with the assistance of the Ministry of Justice and donors, and additional judges have received further training in order to adequately staff the center. The restructuring of the Social Retirement Fund (CSR) has, however, is still in progress. 16. The reporting system of financial operations of the districts is in the process of being implemented. In order to assure the soundness of their finances, the Ministry of Finance and Economic Planning is requiring newly autonomous local administrations to request prior authorization for borrowing. The government has requested technical assistance from the IMF to support capacity building for the decentralization process. Efforts to strengthen the administration of public finances have been significant. An inventory of the physical assets of all central government line ministries, conducted by the Public Accounts Department is under way and should be completed by end-September and work is progressing on a chart of accounts for all units of government. 17. Substantial steps were taken in improving the monitoring and control of extra-budgetary and off-budget activities identified in the recent independent study of government bank accounts. Some key items, such as receipts of the National Tender Board and the Privatization secretariat, were included into the 2003 fiscal reporting framework. The Cabinet requested the submission of full budgets for compilation and inclusion into the 2003 budget from public institutions receiving extra-budgetary receipts in areas such as education and health. However, as initial submissions from these institutions were incomplete, it was decided to postpone the inclusion into the budget until the next budget phase. In addition, a general clause was adopted within the 2003 finance law prohibiting the public administration from incurring any extra-budgetary expenditures. 18. In the areas of financial controls, transparency and accountability, considerable headway has been made. In this regard, following the recommendations of a study on government bank accounts completed during 2002, information was included in the 2003 budget, ensuring that the budget submission includes increased coverage on details on the sources and uses of government funds. In addition, guidelines for the opening, closing and monitoring of government bank accounts were fully enforced during 2002. Beginning on October 30, 2002, data on quarterly fiscal operations for the preceding quarter were posted on the Ministry of Economic Planning and Finance's web-page, and are being regularly updated. (December 2002 data were posted on February 15, 2003.) Finally, the office of the Auditor General has continued to expand and broaden the scope of its activities. Audits of the 2001 accounts of 34 public sector entities including 10 ministries, along with 13 projects, were completed during 2002, and submitted to the President, the Speaker of the National Assembly, the Prime Minister the Chief Justice of the Supreme Court, and the Minister of Finance on April 30, 2003. Legislation to granting public access to the audit reports of the Auditor General (OAG) is being considered by the National Assembly. II. The Medium-Term Strategy 19. With about 90 percent of the population living in rural areas, where poverty is widespread, the medium-term growth and poverty reduction strategy, as set out in the PRSP, focuses on agricultural and rural development, human resources, and infrastructure. This strategy, which places heavy emphasis on the role of the private sector, is to be supported by improved governance and strengthened institutions, a well-focused public expenditure program, and a concerted effort to create an environment that will improve economic productivity, generate employment, and support rapid growth in the formal economy. In agriculture, the PRSP targets an efficient use of fertilizer, largely through outreach and the development of marketing networks, and aims at expanding the export base through the continued privatization of the tea sector and a shift in coffee production to the specialty market. 20. A rapid strengthening of Rwanda's macroeconomic sustainability figures prominently in this strategy. A combination of factors, including the social and political transition, security concerns, and weak international markets for Rwanda's exports have contributed to fiscal and external current account deficits (excluding grants) that continue at a high level. As a consequence, Rwanda remains dependent on external grants and borrowing (which were equivalent to 19 percent of GDP in 2002) to finance a substantial part of government current operations and investment along with the activities of various nongovernmental organizations. As a substantial part of external financing commitments are short term, it is important that both the domestic and the external imbalances be brought to a sustainable level. 21. With key elements of the political and social transition nearing completion, total expenditure and net lending will fall by about 3 percent of GDP during 2004-05, freeing additional resources to support private sector growth. At the same time, Rwanda will take full advantage of its entry into the COMESA free trade area, scheduled for January 2004, and export opportunities provided under the Agricultural Growth and Opportunity Act in strengthening its external viability. 22. Based on this strategy, the medium-term macroeconomic objectives are to (i) achieve annual real GDP growth of at least 6 percent; (ii) keep annual average inflation at 3 percent; and (iii) maintain gross international reserves equivalent to at least six months of imports. As Rwanda's population growth rate is about 3 percent, these objectives would yield modest but significant increases in per capita real income over the medium term. III. The Economic Program for 2003 23. The program for 2003 will aim to maintain macroeconomic stability while continuing to implement the action plan for the PRSP. A particular challenge this year will be the achievement of key elements in Rwanda's political and social transition—including constitutional reform, presidential and legislative elections, the resolution of most cases against those alleged to have participated in the 1994 genocide through the Gacaca process and the associated release of detainees, the implementation of a substantial part of the demobilization program, and the continued decentralization of government—while setting the stage for renewed investor confidence and freeing resources for investment in productive activities. 24. The program for 2003 targets real GDP growth target of 3.2 percent8, annual average inflation of 4.7 percent and, a rise in official reserves, based on a substantial increase in projected external budgetary financing, to 7.4 months of imports. A. Rebuilding the Nation and the Economy 25. The reduction of poverty in Rwanda and the achievement of macroeconomic objectives take into account the regeneration of Rwanda's political and social fabric-an effort that is a prerequisite for success under the PRSP. During January 2003, some 30,000 persons detained for activities related to the genocide were released pending the completion of Gacaca judicial processes that will take action on the cases outstanding against some 110,000 accused, during 2003-04. Under the demobilization program a further 6,352 soldiers will be demobilized during 2004, a projected 15,000 ex-FAR personnel will receive a recognition of service allowance, and 21,468 ex-combatants returning from the DRC will be reintegrated into local communities. Although delayed in order to accommodate continued dialogue, the National Assembly and Cabinet have, as of end-April, 2003, agreed on a draft constitution to be submitted for the consent of the public by referendum. This new constitution will set the basis for the direct popular election of the executive and a bicameral legislature. With this, elements of legal basis for key institutions of economic governance, including the Office of the Auditor General and the appointment of key government officials, will be established on a sound and durable basis. B. Macroeconomic Policies Fiscal policy 26. The fiscal program for 2003 targets an overall deficit on "core" activities of 9.6 percent of GDP. Beyond this, the deficit will be raised by 1.1 percent of GDP to accommodate 0.3 percent of GDP for 2002 demobilization outlays that were delayed from 2002 to early-January 2003 and nonrecurrent outlays that are detailed below, if additional external grants for these purposes are forthcoming, and by a further 0.4 percent of GDP to cover additions to the strategic petroleum reserve,. 27. The continued strengthening of the revenue base is a key element of the fiscal program. Domestic revenue will increase to 13.4 percent of GDP, from 12.2 percent in 2002, as a result of relatively stronger nominal growth in monetary sector GDP, the full year impact of the increase in the VAT rate to 18 percent, new tax measures introduced in the 2003 budget and further improvements in the efficiency of the Rwanda Revenue Authority. Tax measures taken under the 2003 budget include the broadening of the personal income tax base, the extension of the product range subject to excise taxation (automobiles and powdered milk), an increase in the excise tax rate on industrial beer from 40 percent to 57 percent, and adjustments in the structure of taxes on international trade. 28. Although the improvement in the revenue base will be substantial, and the core expenditure program will remain within the limits initially foreseen under the PRGF, exceptional spending for the constitutional referendum and elections and onetime outlays for critical activities in the health sector will increase spending by 1.1 percent of GDP. In addition, in order to address energy security concerns, 0.4 percent of GDP will be added to the domestic investment budget to cover the purchase of petroleum products to be added to strategic petroleum reserves.9 With this, the domestic fiscal balance, including the additional exceptional items and the demobilization spending delayed from 2002, will fall to 3.9 percent of GDP, from 4.2 percent in 2002. The 2003 budget provides for a 17 percent increase in allocations for priority programs (as identified in the PRSP) along with continued funding for assistance to surviving victims of the genocide and Gacaca, among others. Outlays for demobilization and reintegration as well as those for the reestablishment of peace and stability in the region, will peak and support for higher education will continue at a substantial level. 29. In line with the PRSP strategy, foreign-financed capital expenditure is programmed to increase by 10 ½ percent, and given current revenue projections, total spending authorized under the 2003 budget is 0.3 percent of GDP above the level consistent with the deficit target set out in paragraph 26. Any revenue shortfalls would be offset by a reduction in expenditures. Identified areas for such reductions include civil nonpriority goods and services, and transfers. 30. Regarding outstanding domestic obligations, given the impact of exceptional spending on the fiscal stance, the large increase in the accounts payable at the treasury on current operations at end-2002, and the higher-than-programmed settlement of pre-2002 arrears during 2002, the clearance of arrears in 2003 will focus, initially, on bringing the payments float back to a normal level (i.e., no more than RF 2.5 billion by end-2003) before continuing with the clearance of RF 1.5 billion (0.2 percent of GDP) in pre-2002 obligations. Transparency in the prioritization of pre-2002 obligations will be enhanced through the issuance, by end-June 2003, of a list of obligations scheduled for clearance during 2003.10 Monetary policy 31. For 2003, in line with nominal GDP growth in the monetized sector, the target for broad money growth has been set at 8.0 percent at current exchange rates. Targets for the expansion of the monetary base have been set in line with the objectives for broad money. Given the exceptional variability of reserve money during 2002, the National Bank of Rwanda enhanced reporting and analysis to permit daily monitoring of movements in the base.11 This will enable the NBR to promptly tighten liquidity conditions by increasing treasury bill and deposit auction sales. In addition, through periodic adjustments, the discount rate will be set at an appropriate level relative to the interbank market. 32. The gross international reserves of the NBR increased by US$31.5 million, to the equivalent of 6.3 months of import cover, at end-December 2002. It is expected that, during 2003, the government of Rwanda will receive a significant increase in inflows of grants and loans. In order to keep the growth of credit in line with the program, the NBR will accumulate US$55.5 million in the form of foreign reserves, while reducing the net credit to the government by RF 21.9 billion. Partly against the background of a planned sizeable reduction of the stock of government treasury bills held by the commercial banks (by RF 6.7 billion), net credit to government of the banking system is programmed to be reduced by a total of RF 29.3 billion. 33. Regarding the NBR's foreign exchange transactions, the current system of auctions will be improved, reflecting recommendations from a planned IMF technical assistance mission, in order to reinforce transparency in exchange rate determination and to ensure that deviations from the parallel market are kept to a minimum. External sector 34. The deficit on the external current account, excluding current official transfers, is expected to rise to 18.7 percent of GDP in 2003, from 17.2 percent in 2002. This deterioration is projected to result largely from an increase in imports of goods and services, substantially associated with increased payments for petroleum for strategic reserves along with growing service outlays related to higher external assistance. A modest improvement in international prices and a robust growth of coffee and tea export volumes is projected in 2003, reflecting both the benefits of continuing privatization in the tea sector and efforts to shift production to the specialty coffee market. In this regard, the prospect of a higher price for quality coffee appears to have provided incentives to coffee farmers to shift their production to high quality coffee. In support of this drive, 12 new washing stations, an essential element in the processing of coffee beans, will open for the 2003 season. As large inflows of external assistance (primarily from the EU, IDA and the UK) are expected to lead to substantial accumulation of net foreign assets in 2003, policies have been designed to ensure that, in these circumstances, macroeconomic stability is maintained and exchange rate movements remain consistent with underlying fundamentals. 35. Despite the continued substantial real depreciation of the Rwanda franc in recent years, the high level of external current account deficit will continue to remain a concern over the medium term. In light of this, a substantial effort is being devoted to expanding and diversifying the export base, including through the intensified use of fertilizer to increase yields in the production of export crops, and through the replenishment of Rwanda's aging tree inventory. The prospects of a return to stability in the Great Lakes region, in conjunction with the continued implementation of prudent macroeconomic policies, will contribute to the inflow of foreign investment which over the longer term will reduce the dependence of the economy on donor support. 36. The decline in exports of goods and services is expected to have a negative effect on already fragile debt sustainability indicators. Given this, action will be taken to meet the floating triggers under the enhanced HIPC Initiative, in order to reach the completion point and alleviate the heavy burden of the excessive external debt. To this end, work is in progress on a PRSP progress report. At the same time, a prudent debt management policy will be maintained, and new debts will be contracted only on highly concessional terms. Efforts to reach bilateral agreements with Paris Club creditors on Cologne terms and to regularize relations with all external creditors through the signing of rescheduling agreements on terms comparable to those provided by the Paris Club will be intensified. We intend to request a further extension of the consolidation period from the Paris Club creditors until the completion point is reached. We will also strengthen efforts to ensure the participation of all creditors in the HIPC Initiative. C. Structural Policies Decentralization 37. The decision to progressively strengthen decentralized units of government has been made in the context of the overall strategy to reduce poverty and with the aim of increasing broad-based participation in the design, implementation and monitoring of projects and programs at the grassroots level. This approach envisages the development of competent, transparent and accountable local administrations and supporting economic planning capacity. As part of this effort, the Council of Ministers, on October 15, 2002, appointed the executive for the Community Development Fund (CDF), with responsibility for overseeing and coordinating the administration of the development projected implemented at the district level. Under the 2003 budget, RF 4 billion (0.4 percent of GDP) has been allocated for such projects and programs, with additional direct assistance from official bilateral donors. These programs and projects will, as in 2002, continue to reflect consultations between central government ministries and the districts. Beginning in 2004, the National Assembly will be provided with an evaluation of required improvements in the supporting legal framework and an action plan to address identified problems, in particular, with respect to the equitable and efficient allocation of resources across districts. Improving financial accountability and transparency 38. Given the important role of open, transparent and accountable financial accounts in ensuring that government operates efficiently and effectively, the action plan for further strengthening economic governance will remain an important government priority in 2003. In this regard, the Auditor General will conduct audits of 41 public sector entities during 2003, including the Ministry of Finance and Economic Planning and the Ministry of Defense, 7 additional ministries, and the Office of the President.12 In addition, as part of the drive to extend the transparency of government financial operations, authorization for the publication of the AG's annual report is provided under the new draft constitution and publication is expected to begin with the report for 2002. Similarly, the Ministry of Economic Planning and Finance will continue to post quarterly data on government financial operations, in the GFS format, with a one month lag.13 In the area of government procurement, as a new public procurement law will be sent to the National Assembly for consideration in September, 2003, it is expected that reforms to public procurement will be fully implemented by end-September, 2003. The office of the Auditor General is on track to continue expanding according to its action plan, enabling it to audit all line ministries on an annual basis starting in 2005. Administration of public finances 39. Actions to strengthen the administration of public finances and improve the effectiveness and efficiency of government operations remain a priority. Objectives under the action plan, recently developed with the assistance of IMF staff, include improving accounting systems, setting in place appropriate monitoring and oversight mechanisms and increasing the availability of information on government operations. 40. Following the recommendations of the external study of the government's bank accounts (paragraph 18) and other technical assistance, an ambitious agenda has been set for the period ahead. The government will continue in its endeavors to discontinue or bring on budget all relevant operations and, beginning in 2004, the budget will include a statement of tax expenditures associated with both existing and new policies included in the budget, a statement of assets and liabilities of all levels of government, financial statements of public enterprises, a statement of consolidated government equity holdings, a consolidated budget of the districts, a fiscal risk assessment, and a list of all contingent liabilities. 41. The management of government bank accounts will be streamlined by the means of devising and enforcing clear regulation for the operations of accounts, by reviewing the account classification system, and by continued efforts to reduce the number of accounts under operation. A task force has been established to implement this agenda and plans to request that responsible government units provide complete and up-to-date information on accounts in operation by August 30, 2003. Based on this information, the task force will provide recommendations for the closure of accounts which are either dormant or operating outside of controlling regulations by September 30, 2003. The task force will, furthermore, develop a revised common account nomenclature, to assist in monitoring account movements and, beginning with October 31, 2003, account managers will be required to send copies of monthly bank statements to the Ministry of Economic Planning and Finance. In a related effort, immediate steps will be taken to support the monthly reconciliation of balances on government financial operations with the movements financing balances. To this end, the results of a questionnaire requesting information on government bank accounts will be used to identify those which should be generally classified as central government treasury accounts and will, in addition, distinguish government imprest, single-signature project accounts and joint government-donor accounts in the current monetary reporting system by end-June 2003. 42. The enhancement of the public accounts and internal audit mechanisms are key to the improvement of the monitoring and control of public expenditures. An action plan in this area has been developed, with the assistance of IMF staff and other partners. Among the actions to be undertaken in this area will be the completion of an inventory of the physical assets of the central government line ministries, which is now scheduled for completion by end-September 2003. This will be subsequently expanded to cover government assets held by provinces, public enterprises and joint development projects. In addition, a common framework for charts of accounts for use by central and local government is under consideration, and these accounts will be used for the preparation by end-December 2003 of draft final central government accounts for 2002, subject to the availability of technical assistance. At the provincial and district levels, the common chart of accounts will be implemented by end-June 2004. 43. Efforts to energize public debt monitoring will continue, with the second annual phase of assistance from Debt Relief International (DRI) just having started. The Government of Rwanda is determined to strengthen the management of its debt service in order to preclude the accumulation of external arrears. In this regard, an action plan revising administrative procedures and monitoring, including coordination between the Ministry of Finance and Economic Planning and the central bank, has been developed and set in place. Similarly, efforts to boost monitoring of the execution of the foreign-financed development budget continue, and CEPEX will submit a comprehensive analysis of execution in 2002 by June 30, 2003, and will launch quarterly execution reports by September 30, 2003. 44. As the increasing degree of fiscal decentralization has led to enhanced information requirements, efforts will be undertaken to extend the computerized fiscal operations reporting mechanism to all province administrations, and to put in place a reporting mechanism for the district operations. In this regard, borrowing by districts and communal development projects will continue to require authorization from the Ministry of Economic Planning and Finance, in support of centralized monitoring until a complete reporting system has been put in place. 45. The legal framework guiding the administration of public finances will continue to be a key focal area. To this end, after the adoption of the new constitution, the administration will facilitate the swift passage of the draft Organic Budget Law through the National Assembly. In any event a new organic budget law will be submitted to the National Assembly not later than end-September 2003 subject to the availability of technical assistance. Revised financial and accounting instructions, as provided for by the relevant laws, will be prepared by end-July 2003. Furthermore, upon the adoption of the new constitution, the laws governing the Office of the Auditor General will be modified to provide for publication of the annual audits, beginning with the Auditor General's report for 2002. 46. Efforts in the area of tax and customs administration will focus on improvements in the customs administration software, upgrading the border posts, computerization of the tax administration including a unified system of taxpayer identification numbers, and increasing the audit activity of the Rwanda Revenue Authority. In addition, as the streamlining of the system of tax exonerations and incentives under tax laws and investment agreements remains a strong priority, the government has conducted, with the help of IMF technical assistance, a review and analysis of tax exonerations and their legal characteristics. Reflecting the findings of that review, the issuance of ad hoc tax exonerations has been suspended, pending the adoption of revised legislation. Submission of revised investment and tax codes is planned to take place before end-2003.14 Following the creation of a formal appeals process for taxpayers, the establishment of a bill of taxpayers' rights in 2002, and the creation of tax and commercial chambers within the court system are being targeted in order to improve the legal framework facilitating the development of increased private sector activity. Improving efficiency—privatization and the economic environment 47. Privatization, apart from its direct beneficiary effects on the efficiency of Rwandese enterprises, is expected to enable the government to focus its capacities on the provision of public goods, such as education, health and social infrastructure. The Privatization Secretariat will make substantial progress in realizing its objectives in 2003 and 2004. The management contract for Electrogaz was signed by the government and the selected international company by early May 2003. External consultants have written due diligence reports and presented their strategy to the government for the privatization of Rwandatel, which is expected to be brought to the point of sale in December 2003. In the tea sector, the law authorizing the transfer of tea sector from the public domain to the private domain has been adopted by the National Assembly. As a result, calls for tender for the first two tea units, Mulindi and Pfunda, will be issued shortly, which is a trigger for the floating completion point under the HIPC initiative. The sale of one additional tea unit is expected in 2003, with calls for tender for the remaining six units scheduled for 2004. Financial sector reforms 48. While some important steps have been taken toward resolving the problems of the commercial banking sector (paragraphs 13 and 14), the portfolio of nonperforming loans remains elevated and some banks are clearly distressed. Given this, the NBR will continue to closely monitor the operations of troubled banks, both through intensified off-site reporting and through periodic on-site audits, and will ensure that action plans are set in place to redress their difficulties and that their operations follow prudential regulations. The NBR's bank supervision department is scheduled to conduct full audits of four commercial banks in 2003 and will expand its program to all banks during 2004. 49. Following the resolution of issues regarding the terms of reference, a contract was awarded during April, 2003 for a study to identify actions that will strengthen the performance of the financial sector and develop Rwanda's capital market. In addition, a request has been made for the IMF and World Bank to jointly undertake an assessment of the financial sector (FSAP) that, together with the findings of the financial sector study, will provide an action plan for improving asset recovery while avoiding moral hazard or additional calls on budgetary resources. In light of the delays, it is anticipated that an action plan will be ready by end-December 2003, with implementation to begin in March 2004. 50. The restructuring of the BCR is targeted for completion by end-September 2003. Following the restructuring plan approved in 2002, investment documents were issued during May 2003 and, following the identification of an approved list of investors, a tender for sale of majority shares will be issued by end-June 2003. The 2003 budget allocates RF 5 billion (0.6 percent of GDP) as the government's contribution to the restructuring effort (of which, only RF 1.3 billion will be in cash). The government subsequently funded an additional RF 0.6 billion, in order to bring BCR's capital position to zero. At the same time, the NBR is continuing its efforts to seek cooperation of the reference shareholder in meeting its contribution to the recapitalization. 51. Regarding the development of legislation and corresponding institutional structure for preventing money laundering and the financing of terrorist activities, Rwanda has joined a regional association that has been formed to provide technical assistance and share experience. Taking advantage of this, the drafting of required legislation is targeted for completion by end-December 2003, with the establishment of an enforcement unit at the NBR, staffed by trained personnel, planned for March 2004. D. Safeguards 52. A February 2003 review of central bank's external audit mechanism, legal structure and independence, financial reporting, internal audit and internal controls found that the central bank's efforts to rebuild and strengthen the NBR's safeguards and controls were encouraging. After a long hiatus, annual audits of the central bank's financial statements for 1997-2001 were completed during May 2002 and initial steps to strengthen the NBR's internal audit mechanism are in progress. 53. Nonetheless, it is clear that there are areas in which the NBR's safeguards could be usefully improved. In this regard, an action plan has been developed that will establish a formal policy for the conduct of annual external audits of central bank financial statements; written procedures will be developed to ensure that monetary data used for program monitoring purposes follow agreed definitions and are consistent with accounting records; the NBR's Internal Audit Department will be made operational; a set of formal investment guidelines for international reserves; strengthen accounting capacity; outstanding accounting and control issues will be resolved; policies to limit the distribution of profits available for distribution to realized amounts will be set; and procedures governing the appointment and dismissal of senior officials will be strengthened. As part of this action plan, the Ministry of Economic Planning and Finance began the tender process for the 2001 and 2002 external audits of the NBR during March 2003. The appointment of the central bank's Committee of Auditors and establishment of standard procedures for the conduct of annual audits on were completed by May 22, 2003. In line with this, the NBR's Board is expected to resolve to publish audited financial statements for the central bank within 4-6 months of the close of the financial year. IV. Program Coordination and Monitoring 54. The program for 2003 will be monitored on a continuous basis with quantitative and structural performance criteria, benchmarks, and indicative targets. The second review will reflect performance on quantitative benchmarks for March 2003, quantitative performance criteria for end-June 2003, and structural benchmarks and performance criteria through September 2003, and will be completed by mid-November 2003. The third review will reflect performance on quantitative benchmarks for September 2003, quantitative performance criteria for end-December 2003, and structural benchmarks and performance criteria through end-March 2004, and will be completed by end-May 2004. A complete list of quantitative and structural performance criteria, as well as structural benchmarks, is included in Tables 1 and 2, respectively. The attached technical memorandum of understanding lays out the details of program design and terminology.
the Government of Rwanda and the International Monetary Fund |