Press Release No. 02/36

The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for an amount equivalent to SDR 4 million (US$5 million) for Rwanda. The Board determined that Rwanda's Poverty Reduction Strategy Paper (PRSP) provides a sound basis for Fund concessional financial assistance. As a result, Rwanda will be able to draw SDR 0.574 million (about US$0.76 million) under the arrangement immediately.

The Board also approved additional interim assistance for Rwanda under the Enhanced Heavily Indebted Poor Country Initiative of SDR 0.838 million (about US$1 million) to help Rwanda meet its debt service payments on its existing debt to the IMF.

The PRGF is the IMF's concessional facility for low income countries. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a PRSP. This is to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion on Rwanda, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"The authorities are to be commended for preparing a comprehensive PRSP, which lays out Rwanda's poverty reduction strategy following a broad consultative process with civil society and the donor community. The PRSP provides the basis for guiding current and future macroeconomic programs, and with its completion Rwanda has met one prerequisite for the completion point under the enhanced HIPC Initiative, which is expected to be reached next year.

"Achieving sustainable growth and reducing poverty in the period ahead will depend crucially on rapid progress in resolving the security situation in a just and durable manner—thus laying the foundation for resources to be channeled toward building productive capacity. The authorities are strongly encouraged, together with all parties in the Great Lakes region, to buttress progress toward peace and durable stability. This, together with strong policy performance, will be essential to catalyze investor and donor support, and assure financing of Rwanda's program.

"The three-year program that is to be supported under the PRGF is expected, in this setting, to reinforce Rwanda's progress toward macroeconomic sustainability, and to further strengthen its economic and financial institutions. The fiscal program increases resources for poverty reduction and for the promotion of peace and regional stability through an ambitious demobilization and reintegration program; a constitutional referendum to strengthen democratic institutions; initiation of national elections and the decentralization of the public administration; traditional courts to resolve cases against those accused of genocide—as well as resources to support its surviving victims.

"Given the importance of these initiatives, and in order to limit the rise in its debt burden and to assure continued progress towards macroeconomic stability, Rwanda has undertaken a significant effort to increase its domestic revenue base. Key measures include changes in tax policy and revenue administration measures—effectively safeguarding the benefits derived from the HIPC Initiative. In this regard, access to Fund resources has been limited to accommodate more concessional assistance.

"Rwanda's strategy aims at visibly increasing public investment in human and physical capital and at facilitating private sector savings and investment, and rapid economic growth paired with low inflation. It includes an ambitious structural agenda, fostering improvements in the financial administration and its transparency, enhancing governance, and advancing the financial sector and its supervision.

"The Executive Board agreed to Rwanda's request for an extension of interim relief under the enhanced HIPC Initiative, endorsed Rwanda's PRSP as a sound basis for Fund concessional financial assistance, and supported Rwanda's requests for a new three-year PRGF arrangement," Mr. Aninat said.

ANNEX

Recent Economic Development

Although the previous PRGF arrangement for Rwanda expired without the completion of the second review under the third annual arrangement, significant progress was achieved under the PRGF-supported program. Public administration was strengthened, and budgeting was more tightly focused on supporting growth and reducing poverty. Under the program, substantial action was taken to rebuild economic and social infrastructure, and government intervention in the economy was reduced, including the elimination of exchange rate and price controls and the taking of initial steps in privatization and trade liberalization.

Macroeconomic performance during 2001 was strong. Real GDP grew by 6.7%, as a favorable climate stimulated agricultural output and external transfers, equivalent to 11.2% of GDP, spurred manufacturing, construction, transportation, and communications activities. With food in increased supply, the agricultural component of the consumer price index fell, and at end-2001, the consumer price index declined by 0.2% on an annual basis. Prices for nonfood items, however, increased by 3.8% relative to end-2000. With GDP growth robust, fiscal performance was stronger than envisaged in the program. The revenue-to-GDP ratio rose from 9.7% in 2000 to 11.4% in 2001, compared with a targeted 10.8%. With only minor overruns on primary current spending and with domestically financed capital expenditure on target at 0.5% of GDP, primary expenditures amounted to 14% of GDP, and the primary deficit was limited to 2.7% of GDP. The performance objective on social spending was also met. As donor-financed projects were at 6.2% of GDP, 0.7% of GDP below projection owing to implementation delays, and as interest payments were equivalent to 0.8% of GDP, the overall fiscal deficit (excluding grants) was equivalent to 9.5% of GDP—nearly 1 percentage point lower than targeted.

The deterioration in the balance on external trade was limited to US$12 million in 2001, as a sharp decline in export prices for tea and coffee was largely offset by export volume increases and falling petroleum prices. The larger trade deficit, however, was compensated for by a significant improvement in the services balance that resulted from reductions in spending on embassies abroad and lower technical assistance. The deficit on the external current account therefore remained broadly unchanged at about 16% of GDP (excluding official transfers) and 7% after such transfers. With the balance of payments and domestic prices stable, the Rwanda franc depreciated by 5% in real effective terms during 2001, following 10% depreciation in 2000.

Program Summary

The authorities have finalized a PRSP. The program for 2002-2003 supports the poverty reduction strategy formulated in that document. Macroeconomic stability is a key fiscal objective, with emphasis on augmenting the domestic revenue base. The structural reform agenda emphasizes improvements in the financial administration and in governance and transparency, as well as the troubled financial sector and its supervision.

The authorities have targeted a limiting of the overall fiscal deficits to 9.9% of GDP in 2002 and to 9.4% in 2003. The fiscal program aims to strengthen the revenue-to-GDP ratio to 12.2% of GDP in 2002 and 12.7% in 2003, a critical step toward achieving sustainability. The authorities also agreed that monetary policy for 2002-2003 should aim at limiting inflation and appropriately building net foreign assets. Given the surge in monetary aggregates at end-2001, broad money growth in 2002, at about 7%, has been targeted below nominal GDP growth, in order to avoid an inflationary impulse. The authorities are also aiming their reforms in the financial sector at improving banking system soundness. Policies supporting this objective include implementing an accelerated loan recovery system, strengthening the capacity of the NBR's banking supervision department, and improving the capacity of the judicial system through, inter alia, the establishment of commercial courts.

Developments in the external sector under the program during 2002-2003 will largely reflect the impact of exogenous factors, including the plunge in the price for coltan and the continued weakness in prices for coffee and tea. The external current account deficit (excluding grants) is projected to widen from 16.4% of GDP in 2001 to 17% in 2002 and to decline 15.7% in 2003. The overall balance of payments deficit (excluding program grants) is expected to reach US$120 million and US$109 million in 2002 and 2003, respectively.

On the structural reforms, the authorities have set out a focused action plan for improving economic governance, strengthening the administration of public finances, and supporting the decentralization of government. In particular, the plan includes steps to improve budget administration, increase transparency and accountability, strengthen economic institutions, and introduce the legislation and regulations required to ensure efficient, rule-based governance.

Rwanda became a member of the IMF on September 30, 1963. Its quota is SDR 80.10 million (about US$107 million), and its outstanding use of IMF credit currently totals SDR 63.3 million (about US$84 million).

Rwanda: Selected Economic and Financial Indicators
(In millions of U.S. dollars, unless otherwise indicated)
	1994	1995	1996	1997	1998	1999	2000	2001
Domestic economy
Real GDP growth (annual percent change)	-50.2	35.2	12.7	13.8	8.9	7.6	6.0	6.7
Consumer Prices (end of period; annual percent change)	64.4	38.4	8.7	16.6	-6.0	2.1	5.8	-0.2
External economy
Exports, f.o.b.	32.2	50.4	62.0	93.0	64.1	62.0	89.8	93.3
Current account balance	-399.4	-246.2	-266.8	-321.6	-339.0	-323.0	-295.8	-279.2
Capital account balance	6.9	93.5	90.0	115.9	95.1	70.9	62.0	70.1
Financial account balance	-3.5	-19.0	23.3	44.6	51.5	63.9	43.4	73.3
Private capital (net)	12.4	-45.0	-11.4	3.8	5.0	12.2	11.8	22.4
Public capital (net)	-15.9	25.9	34.6	40.8	46.5	51.8	31.6	50.9
Capital and financial account balance	3.4	74.5	113.3	160.5	146.6	134.8	105.4	143.4
Current account balance, excluding official transfers
(in percent of GDP)	-53.0	-19.0	-19.3	-17.4	-17.0	-16.7	-16.3	-16.4
Change in real effective exchange rate (in percent, + = appreciation)	51.9	-39.7	8.6	26.9	-18.3	5.4	-9.6	-4.9
Financial variables
Overall fiscal balance excluding grants (in percent of GDP)	-12.4	-13.7	-13.2	-9.2	-8.3	-9.7	-8.9	-9.5
Change in broad money (in percent)	-6.5	73.7	8.2	47.5	-3.9	6.6	14.4	10.0
Interest rate (in percent) 1/	9.0	12.0	11.0	11.4	10.0	10.1	11.6	10.2
Source: Rwandese authorities; and IMF staff estimates and projections.
1/ One-year savings deposits.