Market vendor in Kigali, Rwanda—where IMF says private sector must drive economic growth (photo: Eric Miller/Picturedesk)
SCALING UP AID
IMF SURVEY: While great progress has been made since the 1994 genocide, what are Rwanda's main economic challenges?
Kostial: Rwanda's progress since the genocide is amazing. To keep up the progress, the private sector must become the driving force for growth in Rwanda. This will require addressing the country's severe infrastructure gap. Rwanda is a small, landlocked country with very high transportation costs. The road and railroad networks—inside Rwanda and in neighboring countries—are weak, severely constraining Rwanda's access to markets.
In addition, the supply of electricity is limited and tariffs are the highest in the region, skilled labor is scarce, doing business is expensive, and the financial system is shallow.
The related and really big challenge is reducing poverty. We were struck by a recent household survey, which showed that between 2000-01 and 2005-06, poverty had declined only by about 4 percentage points—from about 61 percent of the population to around 57 percent. It is now very important that the new Poverty Reduction Strategy Paper (PRSP), which is expected to be completed in the next months, revamps Rwanda's poverty reduction strategy.
In confronting these challenges, extensive reconciliation remains an overriding priority. The country is still dealing with the trauma of the 1994 genocide when 800,000 people were killed.
IMF SURVEY: How does the IMF help to address those challenges?
Engstrom: We help the government put together a policy framework that is consistent with macroeconomic stability and debt sustainability. The framework is embedded in Rwanda's PRSP. A key output is the public spending path, which plays an important role for donors, who finance about 50 percent of the budget.
We also help with capacity building. In the Ministry of Finance, we are helping with the implementation of the public expenditure management system. And in the Central Bank, we are helping with the management of monetary policy and banking supervision.
Kostial: What is great in the case of Rwanda is the good relationship between partners, with information sharing at all levels. In fact, the authorities invite budget support donors to participate in our discussions, so that everybody is on the same page.
IMF SURVEY: Rwanda is expected to be one of the first recipients of scaled-up aid. How will the country be able to absorb such an increase in aid?
Kostial: The Poverty Reduction and Growth Facility (PRGF) is designed to help Rwanda absorb higher aid. Rwanda is already receiving some scaled-up aid. We presented to the IMF Executive Board last month a program that allows for an increase in the fiscal deficit by about 3 percent of GDP in 2007 to accommodate higher aid, particularly from the Fast Track Initiative on Education.
There is also the possibility that Rwanda may get additional funds in the future, including from the U.S. Millennium Challenge Account and the Catalytic Fund. That said, there is still a lot of uncertainty in terms of magnitude and timing.
This year will be important for Rwanda. To pave the way for additional funds, the sizable expansion in public spending has to be managed without jeopardizing macroeconomic stability. The donor community and other countries will also be looking at Rwanda to set an example that scaling up can be successful.
In terms of capacity to absorb funds, you are right that this is a huge issue. As you know, the World Bank takes the lead on the expenditure side. For this year, its assessment is that the authorities have the capacity to spend the higher amounts effectively, and this will be reviewed during the course of the year.
Looking ahead, it is also clear that the public expenditure management system will need to better link policies with poverty indicators. The new PRSP will require some sort of a high frequency monitoring system so that we learn very rapidly what works and what doesn't work.
IMF SURVEY: Poverty is still pervasive in Rwanda. Will the country be able to meet the Millennium Development Goals (MDGs)?
Engstrom: The picture is mixed. The goal to reduce extreme poverty is unlikely to be met. Rwanda is a very poor country and, as Kristina has said, if you look at what has happened in the last five years, not too much has changed, so a lot needs to be done to attack poverty.
On the positive side, a lot of good things have happened. The authorities have increased their spending on health and education, and this has started to yield results. Rwanda has already reached the goals on immunization and HIV/AIDS prevalence, which currently stands at 3 percent of the adult population.
Today about 85 percent of the population in Rwanda has access to health sources within 10 kilometers, and half of the population is covered by health insurance. The gender gap on primary education has been eliminated and the country is also doing well on its targets on universal primary education, child mortality, and access to water.
Kostial: While Rwanda is advancing toward the MDGs, a World Bank study estimates the additional cost of reaching the health and education MDGs at about 5 percent of GDP a year until 2015. This number is really mind boggling, and it is not clear whether the funds will materialize. Moreover, even if Rwanda were to reach the MDGs with a lot of donor money, there is the question of sustainability.
IMF SURVEY: What is it like to live and work in Rwanda?
Kostial: A lot of people may have a negative view of Rwanda. But they would be completely wrong. Rwanda is a very pleasant destination. It's safe, the food is fine, and the hotel is good. But what I find most rewarding in the two and half years that I have been working on Rwanda is that the authorities are really determined to break from the past and build the future. They are very committed.
Engstrom: I agree with everything that Kristina is saying. Rwanda has a wonderful climate, a beautiful countryside, and there is very little crime in the capital, Kigali. I like to go jogging a few mornings every week—at around 6:00 a.m. when it's still dark—and I have never felt unsafe.
