Mrs. Anne O. Krueger
Deputy Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mrs. Krueger,

Ten years after genocide, Rwanda has established strong democratic institutions with the adoption of a new constitution approved by referendum and the conduct of presidential and legislative elections. Government therefore believes that with these firm democratic institutions in place, Rwanda has created a strong foundation for a new future for full implementation of its poverty reduction strategy.

Our economic strategy in the medium-term is therefore in line with our policies and priorities set out in Vision 2020. These have been articulated in the participatory PRSP and subsequent sectoral strategies and also reflect the aspirations of the nation. In line with our economic strategy, we intend to implement strong policies that will raise agricultural productivity and export base to achieve external sustainability. We believe these are essential for wide ranging and sustainable poverty reduction.

In support of our political, economic and social programs, Government reaffirms its commitment to strengthen the foundation for regional peace and security in the Great Lakes area.

The attached memorandum of economic and financial policies (MEFP) reviews the implementation of the 2003 program and sets out the objectives and policies that the government intends to pursue in 2004.

In light of the progress achieved in the implementation of the program for 2003, 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-June 2003 on the domestic fiscal balance, the net accumulation of domestic arrears, and the contracting of nonconcessional external loans; for end-December 2003 on the net foreign assets of the National Bank of Rwanda, reserve money, net banking system credit to government, the domestic fiscal balance, the net accumulation of domestic arrears, and the contracting of nonconcessional external loans; and for the structural performance criteria on the submission of a revised investment code, the issuance of financial instructions, and the incorporation of tax incentives into the structure of the income tax. The Government also requests a third disbursement under its PRGF arrangement with the Fund in an amount equivalent to SDR 1.142 million, following completion of the second and third reviews by the Fund's Executive Board. In view of the delay of the completion point under the enhanced HIPC Initiative compared to the original schedule of December 2002, the government requests additional interim HIPC Initiative assistance in an amount of SDR 4.482 million for the period from June 9, 2004 to June 8, 2005.

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,

Memorandum of Economic and Financial Policies
of the Government of Rwanda for 2004

I. Performance Under the 2003 Program

1. Macroeconomic performance during 2003, under the second annual PRGF arrangement, was greatly affected by poor weather and by unprogrammed spending related to the challenge of assuring a smooth political transition. Nonetheless, with strengthened economic institutions and financial management and oversight, and solid achievements in the implementation of poverty programs, including the achievement of a substantially higher primary school enrollment rate and a reduced incidence of communicable diseases, the foundation has been set for rapid progress in 2004, under the poverty reduction and growth strategy.

2. The rate of real GDP growth fell below the targeted range in 2003, as poor rains led to a fall in agricultural output. In turn, as a result of sharp increases in food prices, along with rising import prices, inflation edged up to 7.7 percent at end-2003, compared with the program target of 3 percent. As grant financing for the political transition and health programs did not materialize and, with other external assistance disbursements delayed to January 2004, international reserves fell by US$29 million, to the equivalent of 5.0 months of import cover.

3. The nonobservance of quantitative performance criteria for end-December 2003 resulted from overspending elections, the financing of a hotel project, and delayed donor disbursements of external program assistance. Action is being taken to correct these slippages in 2004. These include a substantial reduction in net credit to government from the banking system, slower reserve money growth, and a fiscal program that incorporates contingent cuts to assure that the domestic fiscal balance remains consistent with macroeconomic objectives. The missed performance criteria on new non-concessional external debt resulted from an energy rehabilitation loan with a grant element marginally below the 50 percent floor set in the program. The financing for this project will be brought to the required concessionality level by end-June 2004.

4. On the structural side, the structural performance criteria for submission of a revised investment code, issuance of financial instructions for more effective expenditure management, and incorporation of tax incentives into the structure of the income tax were not observed as a result of human capacity constraints. Firm dates have been set for the completion of the missed criteria and action is being taken to assure their realization. Three prior actions, now being implemented, further underscore the strength of resolve on the advancement of the structural agenda.

5. Some progress was achieved toward the fiscal objectives under the 2003 program. Domestic revenue collections, equivalent to 13.5 percent of GDP modestly exceeded the projected level, as weaker-than-expected excise taxes were offset by improved direct tax performance, largely due to changes in the tax on professional remuneration. Nontax revenue was 0.1 percentage points of GDP above the projected level, as improved collection efficiency resulting from the transfer of administrative fees collection to the Rwanda Revenue Authority (RRA) offset disappointing dividend income from public enterprises.

6. Domestic spending exceeded the program target by 1.2 percent of GDP, largely as a result of spending on elections and, late in the year, on unanticipated goods and service outlays. Nonetheless, the performance criteria for recurrent priority spending were met and recurrent defense spending was held to 2.7 percent of GDP, compared with 2.9 percent in 2002, and down from 3.3 percent in 2001. Expenditure on the constitutional referendum in May, and on presidential and legislative elections during August-September 2003, equivalent to 1.6 percent of GDP was roughly twice the budgeted amount. Overall, exceptional spending exceeded the (adjusted) indicative program target by 0.5 percent of GDP. Partly offsetting the impact of this higher spending, savings equivalent to 0.1 percent of GDP were realized on domestically financed capital spending, and outlays for the strategic petroleum reserve were more than halved. Finally, despite progress towards regional peace, voluntary participation in the demobilization program fell short of projections and 0.6 percent of GDP in related outlays were deferred to 2004. Largely as a result of startup delays for grant-financed road works, preliminary data indicate that foreign-financed development expenditures for 2003 were equivalent to about 4.2 percent of GDP—2 percentage points below the programmed level.

7. Given this, the domestic fiscal deficit amounted to RF 50 billion (5.5 percent of GDP) in 2003, exceeding the (adjusted) ceiling set as a performance criterion by RF 26.7 billion. The overall deficit on central government operations amounted to 10.5 percent of GDP before grants, and 2.5 percent of GDP after grants. While the settlement of pre-2003 domestic arrears exceeded the programmed value for end-December 2003 only marginally (by 0.1 percentage points of GDP), the performance criterion on the net reduction of domestic arrears was missed by 1.7 percent of GDP, as the stock of bills payable for 2003 increased substantially because government payments were slowed in light of expansionary monetary conditions.

8. The implementation of monetary policy during 2003 was complicated by the reliance on central bank credit to cover the cost of higher-than-programmed election spending that emerged beginning in July 2003. Additional factors adding to the liquidity expansion were the unprogrammed domestic financing of a hotel project, the relaxation of the limit on the net foreign exchange positions of commercial banks, and lending to the economy by nonbank financial institutions, following the recapitalization of the UBPR credit union under a World Bank loan.

9. As the annual growth rate of broad money (at current exchange rates) rose from 15.8 percent in June 2003 to a peak of 19.0 percent in September (the September reserve money benchmark was missed by 8.2 percent), the National Bank of Rwanda (NBR) took corrective measures. It raised the discount rate from 13.5 percent to 14.5 percent in August and withdrew liquidity from the system through open market operations and higher foreign exchange sales to the market. Consequently, the interest rates on treasury bills and the central bank intervention rate rose from about 11 percent in mid-September to about 13 percent in mid-November. However, the central bank was unable to fully sterilize the fiscal impulse, and reserve money exceeded the performance criterion that had been set for end-2003 by 9.6 percent.

10. Largely as a result of shortfalls and delays in external assistance inflows, the net foreign assets of the NBR declined to RF 57.8 billion at end-2003, from RF 72.6 billion at end-2002, falling short of the (adjusted) floor set under the program by RF 27.8 billion.¹ Net credit to government from the banking system increased to RF 17½ billion during 2003, exceeding the (adjusted) program ceiling by RF 32.6 billion. In addition, banking system credit to the economy grew by 14.8 percent—7 percentage points above the targeted level. As a result, broad money grew by 12.2 percent (on an annual basis) during 2003—4.2 percentage points above the targeted rate (evaluated at the program exchange rate).

11. The higher-than-programmed expansion in monetary aggregates, along with weak export performance (see below) contributed to growing pressure on the foreign exchange market during the second half of 2003. The Rwanda franc/U.S. dollar exchange rate, which had depreciated by 4.8 percent during the first half of 2003, weakened by 8.2 percent during the second half of the year, despite an increase in the amount of foreign exchange offered by the NBR in its weekly auctions from US$1.3 million to US$1.8 million on average.

12. External sector performance deteriorated in 2003, reflecting the collapse of the international coltan market, weak international markets for coffee and tea, and slow progress towards improving productivity and establishing niche markets. While merchandise exports fell from US$67 million in 2002 to US$63 million in 2003, imports of goods and services increased moderately, causing a further weakening of the current account balance by 3.2 percentage points to 19.8 percent of GDP. External budgetary assistance inflows fell short of the projected value by US$73 million (4.4 percent of GDP), as projected World Bank and African Development Bank loans, and European Union grant disbursements were delayed, and additional grant financing to cover election costs and one-off health expenditures, which had been projected at US$18 million, amounted to only US$6 million. Given this lower-than-anticipated external budgetary assistance, the NBR reduced its net foreign assets to US$113 million at end-December 2003, a decline of US$30 million relative to end-2002.

13. In February 2003, a loan agreement was signed with the OPEC Fund and Arab Bank for African Development (BADEA) as part of a financing package for an energy sector project. While the grant element of this loan was substantial (47 percent), it did not meet the concessionality test set under the PRGF arrangement and, as a result, the performance criteria for new nonconcessional external debt for end-June and end-December 2003 and the corresponding benchmark for end-September 2003 were not observed. Agreements have been reached that will increase the grant element of the loan and bring the terms within the required concessionality threshold. In this regard, ratification by BADEA's Board of Directors is scheduled for June 9, 2004. Government guarantees issued in August 2003 for an external US$10 million loan on commercial terms, as part of the financing package for a major hotel project will be repaid in full by end-May, 2004. As no new nonreschedulable arrears have been accumulated in 2003, the performance criterion for external arrears was met. To strengthen external debt service management, an action plan is currently being implemented. Furthermore, the second phase of a capacity building program with Debt Relief International, was started in January 2003. Activities so far undertaken have included three country missions to deal with institutional reforms as well as the organization of a workshop on Rwanda's longer-term debt sustainability.

14. Rwanda's external debt amounted to US$1.4 billion (85 percent of GDP) at end-2003. 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 June 2003, decided to extend the consolidation period from June 20, 2003 to June 30, 2004 on the basis of Cologne terms. Paris Club creditors have been requested to further extend the consolidation to end-June 2005. During 2003, Rwanda reached agreements on debt cancellation or rescheduling with some of its Paris Club creditors; remaining negotiations are expected to be concluded prior to the June 30, 2004 deadline for reaching bilateral agreements. 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.

15. The agenda for structural reform in 2003 included steps to improve the efficiency and productivity of the private sector, and to strengthen the effectiveness, comprehensiveness and accountability of public finances and the financial sector. Substantial progress was achieved in each of these areas. In a step to strengthen Rwanda's public utilities, a five-year management contract for the electricity and gas parastatal, Electrogaz, was agreed in March 2003 and entered into operation in October, 2003. In telecommunications, the offer for sale of the public telecommunications company, Rwandatel, will be issued in May 2004. As a critical component of the export promotion strategy set out in the PRSP, the government sold 13.4 percent of its shares in Sorwathe (a tea processing factory) to a private investor and a further 10 percent to a farmer's association. In addition, two state-owned tea estates were offered for sale at end-August 2003, following the adoption of enabling legislation by the National Assembly. One of the bids received in early-February 2004 remains under review, with a decision expected shortly, while the other bid has been accepted. The privatization of three rice processors, and mining, printing, hotel, and livestock enterprises will constitute the next steps in this area.

16. Similarly, important steps were taken towards addressing structural issues in the financial sector. The framework for the supervision of microfinance institutions was strengthened, with on-site inspections slated to begin in 2004. In addition, during 2003, loan recovery improved, access to mortgage finance was widened, and information sharing was initiated between banks on creditor risk. With this, the share of gross nonperforming loans in total loans stabilized at 37.4 percent at end-December 2003. A World-Bank-sponsored financial sector study was completed in April 2004. In addition, the restructuring of the Caisse Hypothécaire du Rwanda (CHR) is planned.

17. While the tender for sale of the Banque Commerciale du Rwanda (BCR, a structural benchmark for end-June 2003) was delayed, substantial progress was made towards the sale of the bank. An action plan was implemented for improving BCR's profitability ahead of privatization. The bank was advertised for sale in major publications in June 2003, and prospective investors subsequently undertook due diligence inspections. Under a revised timetable, the offer for sale of the bank is expected to take place by end-July 2004.

18. The strengthening of public financial management constituted the most ambitious component of the reform agenda. While the achievement of specific objectives has proven to be a greater challenge than had been anticipated, overall progress can only be rated as a major success. The adoption of a new constitution at end-May 2003 established a new and clear framework for the institutions of public finance. The Auditor General (AG) was vested with sole accounting authority, reporting directly to parliament. During 2003, the AG's office audited the 2002 accounts of 41 public entities, including nine ministries (including the Ministries of Defense and Finance), with a report issued to Parliament in March 2004. The framework for government financial operations was clearly set out. With this, and with technical assistance from the Fund staff, a new Organic Budget Law (OBL) was drafted and readied for submission to parliament, planned for June 2004. (The submission of the OBL to parliament has been delayed from the September 2003 program benchmark to end-June 2004. As a result of the delayed submission of the OBL, the issuance of financial instructions, which will provide complementary operational details and which had been set a structural performance criterion for end-January 2004, is now set for end-May 2004.)

19. Following a joint World Bank/United Kingdom financial accountability review and assessment plan (FARAP) diagnostic mission in February 2003, a draft action plan was issued in June 2003. This action plan, which incorporates inputs from the Fund, builds on existing commitments and previous advances, covering the legal and institutional framework and budget and expenditure management. At the same time, a number of the structural actions envisaged under the 2003 program were realized, including a comprehensive review of tax exonerations, exemptions and incentives. (The respective structural performance criterion was completed by end-June 2003.) Progress was also made on structural benchmarks set under the program: a draft report on the implementation of the 2002 development budget was issued in July 2003, and finalized the following September; a list of overdue obligations scheduled for clearance during 2003 was issued in September 2003; and, with Fund staff support, drafting of a new investment code and tax laws was initiated.

20. Despite the substantial achievements noted above, the calendar set for reforms in the area of public financial management proved overly ambitious. In addition to the previously noted delays on the OBL and supporting financial instructions, the preparation of legislation for submission of a revised investment code to parliament, incorporating tax incentives into the tax law (a structural performance criterion), could not be achieved under the timetable fixed under the 2003 program. These actions, as noted in paragraph 18, will be realized over the coming months. Substantial progress was made in implementing other structural benchmarks including, setting the Ministry of Finance and Economic Planning's (MOF) internal audit department fully in place (a structural benchmark); the development of a monthly reporting mechanism for district governments, and the closure of government dormant accounts.

21. The National Bank of Rwanda (NBR) made substantial progress towards meeting the structural benchmarks set in the reform agenda for the financial system. In an effort to improve regulatory compliance, the NBR issued new instructions on solvency ratios, risk exposure and provisioning at end-December 2003. Actions taken in response to the recommendations of the April 2003 Fund safeguards mission are detailed in paragraphs 49-50. In addition, the central bank continued its consultations on the drafting of new anti-money laundering legislation. Related to this, Fund and World Bank staff will provide technical assistance in drawing up required legislation, and an enforcement unit will be established at the NBR during 2004.

II. The Medium-Term Strategy

22. Rwanda's medium term strategy for poverty reduction and economic growth continues to be guided by the policies set out in its Poverty Reduction Strategy Paper (PRSP), which was issued in June 2002. The PRSP progress report issued in July 2003 sets out the substantial advances made in human resource development as well as the contributions made by improved governance and regional peace to development objectives. Looking forward, the immediate challenge will be the full elaboration of policy frameworks in the nonsocial sectors and their implementation. In particular, in the period ahead, an increased focus will be placed on improving the supply response of the economy, reducing its vulnerability to exogenous shocks, and strengthening the performance of the external sector. This approach will include programs to improve access to fertilizers and improved seeds, and rural infrastructure development, with a view to increasing employment and incomes in rural areas. The export promotion strategy, currently under review, aims at the diversification of the export base through the privatization of the tea sector, a shift in coffee production to the specialty market, and the development of tourism activities.

23. The medium term strategy recognizes the critical importance of macroeconomic stability in supporting the attainment of poverty reduction objectives and envisages, over the medium to long term, the gradual reduction of macroeconomic imbalances and dependence on external grants and borrowing. The phasing out of transitional programs and targeted improvements in domestic resource mobilization, and the impact of the export promotion strategy, combined with prudent macroeconomic policies, will contribute to the realization of this objective. Furthermore, at least in the short run, a strong effort to mobilize more grants from development partners, to supplement current medium and long term grant commitments, will help to assure that external sustainability is achieved and maintained. Under a policy cooperation agreement that was reached with cooperating partners in November 2003, communications on external budgetary assistance will be moved forward in the planning cycle, donors will aim towards multi-year commitments, and policies will be drawn from a commonly supported framework with joint progress reviews.

III. The Economic Program for 2004

24. The program for 2004 will provide resources to assure that substantial progress is made towards achieving poverty reduction objectives and for placing Rwanda on a trajectory towards achievement of the millennium development goals by 2015. This agenda will include, beginning in 2004, a 10 percent rise in the number of educators, with fees eliminated for primary education. Funding for health programs has been substantially increased. At the same time, substantial focus will be placed on strengthening export performance, moving forward with the privatization agenda, making the legislative and regulatory climate more conducive to investment, and improving economic infrastructure and productivity. This will continue to be supported by steps to strengthen management, transparency and accountability in the financial sector and in public finances.

25. Based on the PRSP, the medium-term macroeconomic objectives are to (i) achieve annual real GDP growth of at least 6 percent; (ii) limit end-period inflation at 5 percent in 2004 and 3 to 4 percent thereafter; and (iii) reconstitute and maintain gross international reserves equivalent to at least 6 months of imports. As Rwanda's population growth rate is about 3 percent, these objectives should yield significant increases in per capita real income over the medium term.

A. Macroeconomic Policies

Fiscal policy

26. The fiscal program for 2004 aims to consolidate gains made in revenue policy and administration over the preceding two years, while drawing on substantial increases in pledged external grant assistance to finance an ambitious, yet well-focused, government expenditure program. While no major tax policy changes are planned for 2004, past reforms will come fully into play. Custom duties on a reciprocal basis with other FTA members were eliminated as a result of Rwanda's entrance into the COMESA free trade area (FTA) on January 1, 2004. Direct tax income will reflect on a full year basis the impact of revisions in marginal rates and in the taxation of professional remuneration. In addition, further action to strengthen revenue administration, building on technical assistance from the IMF and United Kingdom, including the formation of a large taxpayer unit at the Rwanda Revenue Authority, will support strong revenue performance. All told, government domestic revenue is projected to steady at 13.5 percent of GDP in 2004.

27. Government domestic spending is budgeted to increase to the equivalent of 21.3 percent of GDP in 2004, which reflects a substantial increase from the 14¾ percent that had been envisaged under the initial PRGF arrangement. As previously noted, given increased availability of external financing, implementation will begin in earnest on a full range of programs, including new constitutionally mandated institutions, free basic education, government counterpart contributions for a comprehensive HIV/AIDS treatment program, supplementary pay for health sector workers, human resource development in tertiary education, labor intensive rural works, and export promotion, all of which are drawn from the PRSP. The 2004 budget also reflects 0.5 percentage points of GDP in demobilization outlays that have been carried over from 2003. As a result, government priority spending is budgeted to rise to 45 percent of domestic expenditure, as targeted. Beyond this, net lending will increase by the equivalent of 1.5 percentage points of GDP to cover guarantees issued to finance hotel construction in 2003 and to finance completion of the hotel project in 2004, and to the electricity parastatal (Electrogaz) to finance the procurement of emergency generating equipment and related fuel oil.

28. As a result, the domestic fiscal deficit under the 2004 budget is set to rise to the equivalent of 7.8 percent of GDP. The budget also provides for the settlement of 0.9 percent of GDP in unpaid government bills (on a net basis) that were outstanding at end-2003 and outlays equivalent to 0.7 percent of GDP on government domestic arrears accumulated prior to 2002. Taken together with payments to nonbank public entities, the total budgeted government borrowing requirement for domestic operations (net of taxes) amounts to about 10.3 percent of GDP.

29. Currently identified external budgetary grants (equivalent to 8 percent of GDP) fall short of fully meeting financing requirements, As additional external borrowing to meet the financing gap would raise Rwanda's net present value of external debt-to-export ratio further above established norms, and as rapid spending could add to the substantial monetary overhang at the beginning of 2004, budgetary operations equivalent to 1.4 percent of GDP were rephased from the first to the second half of 2004. These operations will be authorized only to the extent that additional external grant financing is secured and if monetary policy remains on track.

Monetary policy

30. Monetary policy has been set with the objective of bringing inflation down to 5 percent at end-2004. Accordingly, and taking into account the GDP growth objective for the monetized economy, broad money is targeted to increase by 11 percent (at the program exchange rate) by year-end. Targets for the expansion of the monetary base have been set accordingly. The NBR will closely coordinate with the Ministry of Finance through the recently established Treasury Committee, in order to ensure that fiscal and monetary policy implementation operate effectively. The development of a secondary market for government securities, which is now underway, is expected to strengthen the effectiveness of the NBR's policy implementation in the period ahead. In order to improve the information base for monetary control, the NBR will start to publish a new consumer price index for Kigali during the first half of 2004.

31. Despite the projected increase in external assistance inflows of grants and loans, given increased foreign exchange sales and government external payments, the NBR's international reserves will fall by US$6 million and, with this, gross official reserves will fall to the equivalent of 4.6 months of import cover. Net credit to government by the banking system is targeted to increase by RF 5.5 billion, while credit to the economy is programmed to grow by 10.6 percent.

32. Regarding the NBR's foreign exchange transactions, the operation of the auction will be further strengthened. The NBR will review, with assistance from the IMF staff, the current auction system, in order to limit collusion among auction participants and ensure that auction exchange rates are market determined.

External sector

33. The deficit on the external current account, excluding current official transfers, is expected to rise to 21.4 percent of GDP in 2004, from 19.8 percent in 2003. Underlying this projection, merchandise exports appear set to increase modestly to US$68 million, mainly as a result of an increase in the volume of tea and nontraditional exports. Gains in coffee exports, while benefiting from a modest increase in international prices, are likely to be constrained by poor rains, shortages of inputs, and limited infrastructure. The international sale of fully washed coffee is likely to remain relatively flat, while coltan export volumes are projected to continue their secular decline in 2004. Merchandise imports, driven by increased outlays for the development budget and intermediate goods, including fertilizers, along with the previously noted purchase of electricity generating equipment and fuel oil, are projected to rise by 16 percent.

34. As part of efforts to address the structural issues underlying Rwanda's disappointing export performance, an export promotion commission, established in December 2003, submitted a preliminary short-term action plan for cabinet consideration in February 2004. That plan incorporates a working capital facility for the coffee sector, funds for producer and grower-targeted programs, and an export finance facility. To ensure the compatibility of these priority actions with the government's broad development objectives as well as their swift implementation, external partners have been asked to provide support in the articulation of necessary policies and institutions. Beyond this, work continues on a strategy for the diversification of the export base, which will be facilitated by the return to stability in the Great Lakes region, and a growing outreach to COMESA markets.

35. The decline in Rwanda's exports of goods and services in 2003 further weakened the already fragile debt sustainability indicators. Given this, and taking into account the importance of reaching the Completion Point (CP) under the HIPC Initiative as soon as possible, action is continuing in order to meet the remaining floating CP triggers, while maintaining a prudent debt management policy. New debt will only be contracted on highly concessional terms, and will be limited to levels consistent with assumptions made at the time of the Decision Point. In this context, the government reserves the option to rephase the execution of its development budget in case the programmed external grant financing were only partially forthcoming. Efforts to reach bilateral debt rescheduling 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, are currently underway. We will also strengthen efforts to ensure the participation of all creditors in the HIPC Initiative.

B. Structural Policies

Steps to improve economic productivity and external sustainability

36. Government activities to strengthen Rwanda's economic productivity and external sustainability will be significantly intensified in 2004. The privatization of the telecommunications parastatal (Rwandatel), along with the finalization of the sale of tea factories at Mulindi and Pfunda, and the preparation for the offering of the seven remaining estates, will contribute to this effort. In addition, a comprehensive policy framework for Rwanda's water sector and energy regulation is slated for development, with World Bank assistance. The government will continue efforts to sell a majority share in Prime Holdings, which developed two hotel projects during 2003, to private investors. The government is also continuing discussions with private investors on the development of a methane gas project at Lake Kivu.

37. At the same time, additional steps will be taken to further strengthen the legal framework, in order to create an attractive environment for investment. In particular, a new investment code has been drafted and will be submitted to parliament by end-September 2004. Moreover, a new mining code is being drafted and will be submitted for parliamentary consideration by end-2004.

38. Given the disappointing economic performance of 2003, the implementation of the development strategy set out in the PRSP will be accelerated. A labor intensive public works project, developed with donor assistance, will initiate operations, including land terracing, reforestation, wetlands reclamation, road rehabilitation and extension, and the construction of district markets. Alongside this, the Ministry of Agriculture, in consultation with supporting partners, is reassessing its policy framework and reviewing modalities for improving access to agricultural credit, and the distribution of fertilizer and improved seeds.

39. In the external sector, the government export promotion taskforce that was constituted in December 2003 will submit a detailed export promotion action plan for cabinet consideration by end-June 2004. The plan will include recommendations for the establishment of an effective management structure and will set out a specific and time-bound agenda for strengthening export performance.

Extending reforms in the legal framework and institutions

40. The important achievements realized during 2002-03 in establishing modern, efficient and transparent laws and institutions for Rwanda's public finances will be extended in 2004. The new organic budget law, which is now pending cabinet review, will be submitted to parliament by end-June 2004. Supporting this, critical financial instructions have been readied and will be issued in tandem with the budget law. A draft income tax law, prepared with technical assistance from the IMF, eliminating ad hoc exemptions and exonerations in line with the recommendations of an IMF technical assistance report, was finalized and presented for cabinet consideration at end-March 2004. The submission of the new tax law to parliament is targeted to take place by June 30, 2004, and will be accompanied by a new procedures manual. The new procurement code, drafted in 2003, is slated for cabinet approval by end-May 2004. Finally, a draft customs law was finalized and sent for cabinet consideration at end-June 2004. It is expected that, with parliamentary approval, the law will take effect beginning with the 2005 budget.

Strengthening the administration of public finances

41. Building on earlier achievements and on a broad range of technical assistance from various development partners, including the IMF, a draft action plan, reflecting the findings of a financial accountability review and assessment, conducted by a United Kingdom-led team in cooperation with the World Bank, was issued in June 2003. In February 2004, a treasury management team was appointed to manage the plan's implementation, building on the findings of a European Union-sponsored team that visited Rwanda in March 2004 to assess associated costs. In tandem, the World Bank will conduct, in conjunction with the development of a new poverty reduction strategy credit, a country financial accountability assessment, and the Fund and the World Bank will jointly update their earlier HIPC assessment and action plan, providing a supporting review of government financial administration.

42. While the above noted reviews are in process, the implementation of the current agenda for the strengthening of public financial management will continue. For 2004, programmed actions will focus on budgeting, internal accounting, and decentralization. In particular, a new chart of government accounts for all units of government, developed in 2003 and tested, early in 2004, will be applied beginning with the 2005 budget. At the same time, with assistance from the IMF staff, the government's computerized fiscal operations reporting system will be extended to cover the provincial level, and the reporting mechanism extended to cover district government operations by end-December 2004, supporting enhanced monitoring, including monthly reporting.

43. Efforts to streamline the management of government bank accounts will continue. The task force established to implement this agenda will issue a progress report by end-September 2004. In addition, following the publication of required notifications, in 2004 the NBR will proceed with the closure of accounts which are either dormant or operating outside of controlling regulations, and will issue a progress report by end-December 2004. At the same time, the Ministry of Finance and Economic Planning intends to intensify efforts to reconcile on a monthly basis the balances on government budgetary operations with the movements in its financing balances. IMF staff will also provide assistance on treasury reforms, including the progressive phase out of nontreasury bank accounts, and the adoption of a treasury single account system, beginning in 2005. In this regard, monthly reconciliation statements, clearly showing the unreconciled differences between fiscal and monetary data, will be published on the Ministry's website on a quarterly basis, with no more than a one month lag, beginning in July 2004.

44. In order to strengthen the budgeting process, an inventory of the physical assets of the central government line ministries, provinces, public enterprises and joint development projects is now scheduled for completion by end-December 2004 and will be annexed to the 2005 budget. In addition, reflecting a delay from last year, the 2005 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.

45. Substantial progress has been made in making government finances more transparent. The Auditor General's report on government 2002 operations will be made public at end-June 2004. In addition, in accordance with the law, consolidated central government accounts for 2003 were transmitted to the Auditor General at end-March 2004, and his audit based on those accounts will be submitted to parliament by end-June 2004. In 2004, as in 2003, the Auditor General will conduct audits of the 2003 operations of every central government ministry. As in 2003, a detailed list of pre-2002 domestic obligations scheduled for clearance during 2004 will be issued by end-June 2004.²

46. Efforts will continue to strengthen the Rwanda Revenue Authority (RRA). The reform agenda at the RRA in 2004 includes the establishment of a large taxpayer office and an operations policy department, along with the appointment of a single commissioner for tax operations. The system of tax identification numbers will be improved, accommodating the prompt elimination of separate value added tax registration numbers. Late filing penalties for tax returns will be reviewed and tax legislation will be updated to include penalties for tax fraud. The computerization of the tax (and customs) administration will continue during 2004.

Continuing financial sector reforms

47. The NBR will further increase its efforts to reestablish the observation of prudential regulations on a regular basis. In order to achieve this objective, it will work with commercial banks to agree on action plans, including specific steps, and deadlines and sanctions, for bringing them into compliance with banking regulations by end-December 2004. Agreement on the plans is targeted for end-June 2004. With regard to the regulation on the net open foreign exchange position, by May 31, 2004 the central bank will restore the governing regulation to the text in force one year earlier. In 2004, the central bank supervision department plans to conduct full annual audits of four commercial banks and the Rwandan Development Bank. The NBR plans to audit all commercial banks annually, beginning in 2005.

48. The sale of Banque Commerciale du Rwanda (BCR), delayed from 2003 in order to accommodate due diligence requests from interested investors, is now planned to be completed by end-July 2004. The rehabilitation of CHR will be completed in 2004. Following the completion of the World Bank-sponsored financial sector study, a joint Fund-World Bank financial sector action plan (FSAP) mission has been scheduled for the fourth quarter of 2004. The FSAP will provide a comprehensive program for the reform and development of Rwanda's financial sector.

C. Safeguards

49. Key recommendations of an IMF safeguards assessment for the improvements of the NBR's control, accounting, reporting and auditing systems have been implemented. The recommendations of the safeguards assessment that have been implemented include conduct of external audits of the NBR for 2001 and 2002; the establishment of a formal policy for the conduct of annual external audits; the adoption of resolution to publish the audited financial statements within six months of the financial year; and the limitation of 2004 distributable profit to realized gains, net of unrealized losses.

50. Several recommendations by the IMF and external auditors are still in the process of implementation. IMF recommendations not yet (fully) implemented include the establishment of written procedures to ensure that monetary data used for program monitoring follow agreed definitions and are consistent with accounting records; an audit of program data as of September 30, 2003; the recruitment of additional accounting and internal audit staff; amendments to the central bank law with respect to internal accounting and audit procedures and the legal protection of senior staff in conducting their duties; and the tender for a study on potential improvements in the risk management of NBR.

IV. Program Coordination and Monitoring

51. The monitoring and program coordination is expected to be strengthened by the recently established treasury committee, which comprises members from the Ministry of Finance, the Rwanda Revenue Authority, and the NBR and is headed by the Secretary General of MOF. The program for 2004 will be monitored on a continuous basis with quantitative and structural performance criteria, benchmarks, and indicative targets. The fourth review will reflect performance on quantitative performance criteria for June 2004 and structural benchmarks and performance criteria through September 2004 and will be completed by mid-November 2004. The fifth review will reflect performance on quantitative performance criteria for end-December 2004, and structural benchmarks and performance criteria through end-March 2005, and will be completed by end-May 2005. 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.

Table 2. Rwanda: Proposal for Structural Conditionality Until the Third Review of the PRGF-Supported Program, 2002-04
Action	Timing	Status1
Ratify a revised 2002 budget in parliament reflecting the understandings reached during the program discussions; including the following elements: import tariff bands at 0, 5, 15, and 30 percent in line with initial CET; VAT rate increased from 15 percent to 17 percent; and reduction in the corporate income tax rate from 40 percent to 35 percent, announced.	7/1/02	Prior action PRGF 2 (met)
Bring reserve money to or below indicative ceiling for end-June 2002.	6/30/02	Prior action PRGF 2 (met)
Issue guidelines determining qualification and priority for payment of outstanding government obligations for payment, eliminating discretion.	7/1/02	Prior action PRGF 2 (met)
Enact a budget for 2003, which specifically contains the following elements: excise tax on sales of new and used cars, with rates of 5, 10, and 15 percent, depending on engine size (less than 1500 cc, 1500 cc to 2500 cc, and above 2500 cc), on vehicle sales. reform the Tax on Professional Remuneration (TPR) Law to make all salary allowances in cash and in kind fully subject to the TPR. Pass the reform in form of an amended TPR Law. Revoke the decrease in the beer excise tax rate and start collecting again at a rate of 57 percent, if revenue collection during June-October 2002 does not meet the target set out in the TMU.	1/1/03	Structural performance criterion First review (met)
Finalize restructuring plan for a specified commercial bank consistent with understandings with IMF staff.	9/30/02	Structural benchmark First review (met)
Start publishing statistics of government financial operations, following the Government Finance Statistics (GFS) format, on a quarterly basis.	10/31/02	Structural benchmark First review (met)
Incorporate any extrabudgetary and off-budget projects and transactions identified by the recent stocktaking exercise into the budget to the extent appropriate.	12/31/02	Structural benchmark First review (not met/in progress)
Develop and implement a mechanism to ensure that all borrowing by district governments is reported to the central government on a monthly basis.	12/31/02	Structural benchmark First review (not met/in progress)
To improve the management of the large volume of nonperforming loans, commission a comprehensive financial sector study, together with the World Bank.	Tenders to be awarded no later than 7/31/02	Structural benchmark First review (not met/implemented in November 2002)
Conduct full audits of three banks.	12/31/02	Structural benchmark First review (met)
Ensure that the National Bank of Rwanda (NBR), the Ministry of Finance and Economic Planning, the Ministry of Justice, and the Bankers' Association will jointly prepare an action plan to improve the legal environment to facilitate stronger loan recovery.	12/31/02	Structural benchmark First review (not met/implemented in 2003)
Ministry of Finance and Economic Planning to establish standard operating procedures for the conduct of annual audits of the NBR.	5/31/03	Prior action First review 3 (met)
Complete a comprehensive review of all tax exonerations, exemptions and incentives under tax laws and investment agreements; and remove and/or modify such special treatment	6/30/03	Structural performance criterion Second review (met)
Complete the report on implementation of the 2002 development budget	6/30/03	Structural benchmark Second review (not met/implemented in September 2003)
Issue the tender for the sale of Rwanda Commercial Bank (BCR)	6/30/03	Structural benchmark Second review (not met, in progress)
Issue list of overdue obligations scheduled for clearance during 2003	6/30/03	Structural benchmark Second review (not met/implemented in September 2003)
Prepare financial instructions in order to promote effective expenditure control.	7/31/03	Structural performance criterion Second review (met)
Establish written procedures to ensure that monetary data used for program monitoring purposes are in accordance with the TMU and can be reconciled to the accounting records. External audit firm to complete, subsequent to the completion of the audit of the NBR's 2002 financial statements, a review of the consistency between data reported to the IMF and the audited financial statements.	8/31/03	Structural benchmark Second review (not met/in progress)
Issue action plan for the closure of dormant accounts and accounts operating outside of controlling regulations	9/30/03	Structural benchmark Second review (met)
Implement a monthly reporting mechanism for the financial operations of all districts	9/30/03	Structural benchmark Second review (not met/in progress)
Submit Organic Budget Law to parliament	9/30/03	Structural benchmark Second review (not met/in progress)
Submit revised investment code to parliament, repealing indirect and direct tax provisions of the code, excepting those of a purely administrative nature, and removing the discretionary authority of the Rwanda Investment Promotion Agency to issue tax incentives.	12/31/03	Structural performance criterion Third review (not met/in progress)
Operationalize the NBR's Internal Audit Department by (i) restricting the director's responsibilities to internal audit matters; (ii) NBR Board adopting an audit charter; (iii) recruiting two qualified and experienced internal audit staff members; (iv) completing an audit risk assessment of all NBR operations; (v) auditing program data as of September 30, 2003; and (vi) preparation of a plan for 2004 audit activities approved by the Governor.	12/31/03	Structural benchmark Third review (met)
Issue financial instructions in order to promote effective expenditure control.	1/31/04	Structural performance criterion Third review (not met/in progress)
Incorporation of tax incentives into the structure of the income tax, applicable, in principle, to all taxpayers.	3/31/04	Structural performance criterion Third review (not met/in progress)
Cabinet approval of a new procurement code	5/31/04	Prior action4,5
NBR to establish written procedures ensuring data reported to the IMF for program purposes are consistent with the TMU and reconciled with accounting records	5/31/04	Prior action4,5
NBR regulation on the net open foreign exchange position of commercial banks to be restored to the text in force in June 2003	5/31/04	Prior action4,5
External audit firm to complete the audit of the NBR's 2003 financial statements	6/30/04	Structural benchmark Fourth review4
Submit revised 2004 budget to Parliament	6/30/04	Structural performance criterion Fourth review4
Finalization of action plans, including progressive penalties, for bringing commercial banks into full compliance with banking regulations by 12/31/04	6/30/04	Structural benchmark Fourth review4
Cabinet approval for export promotion action plan	9/30/04	Structural benchmark Fourth review4
Monthly reconciliation statements for government financial statements to be published on a quarterly basis, with no more than a one-month lag	10/31/04	Structural benchmark Fifth review4
Statements, including tax expenditure, assets and liabilities, public enterprise finances, government equity holdings; consolidated district government budget; and list of government contingent liabilities to be included in the 2005 budget	10/31/04	Structural benchmark Fifth review4
1The disbursements of the second and third loan under the new PRGF arrangement are conditional upon completion of the first and second reviews, respectively. 2Prior actions for publication of Executive Board documents for the decision on the August 2002 PRGF arrangement. 3Prior actions for publication of Executive Board documents for the completion of the first review. 4Newly proposed measure. 5Prior actions for publication of Executive Board documents for the completion of the second and third reviews.

Technical Memorandum of Understanding Between
the Government of Rwanda and the International Monetary Fund

May 20, 2004

1. This memorandum outlines the understandings between the Rwandese authorities and the IMF mission with regard to the definitions of the quantitative and structural performance criteria, and quantitative benchmarks and indicators for the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. It also sets out the modalities and data reporting requirements for monitoring the program.¹

2. Revisions to the definitions since the last version of the Technical Memorandum of Understanding (TMU) have been made in the following areas: external budgetary support; net foreign assets; net credit to government; domestic fiscal balance; reserve money, and broad money; nonconcessional external debt, short term external debt; and data requirements for the monetary sector and electronic data reporting.

I. Target Variables under the Program

A. External Budgetary Support

3. Definition: External budgetary support is defined as all official external grants and official external loans to the central government (including all expected or received HIPC Initiative-related grants), except for external grants and loans related to the development budget. In case a program is over financed (negative financing gap), programmed external budgetary support refers only to that level of external budget support needed to close the financing gap to exactly zero at the time of the agreement.

4. Reporting requirement: Data on external budgetary support, separately detailing grant and loan inflows, will be transmitted to the African Department of the IMF on a monthly basis within three weeks of the end of each month.

B. Net Foreign Assets of the National Bank of Rwanda (NBR)

5. Definition: Net foreign assets of the NBR in Rwanda francs are defined, consistent with the definition of the Special Data Dissemination Standards (SDDS) template, as external assets readily available to, or controlled by, the National Bank of Rwanda (NBR) net of external liabilities of the NBR. Pledged or otherwise encumbered reserves assets including, but not limited to, reserve assets used as collateral or guarantee for third party external liabilities, are to be excluded. Foreign assets and foreign liabilities in U.S. dollars are converted to Rwanda francs by using the U.S. dollar/Rwanda franc program exchange rate.² Foreign assets and liabilities in other currencies are converted to U.S. dollars by using the actual end-of-period U.S. dollar/currency exchange rate. Foreign liabilities include, inter alia, use of IMF resources (CCFF and post-conflict emergency assistance purchases and SAF/ESAF/PRGF disbursements).

6. Target and adjustments: The program sets a floor on net foreign assets of the NBR (as a performance criterion or benchmark depending on the test date). In case of higher than programmed inflows of general external budgetary support, excess amounts are targeted to be saved as reserves. The program floor on net foreign assets will thus be increased by any positive difference between actual and programmed general budgetary support. Shortfalls of less than US$20 million of the programmed level of external budgetary support, as defined in paragraph 3, for end-September 2004, and US$25 million of the programmed level for external budgetary support for end-December 2004 will not be adjusted. The program floor on net foreign assets will be adjusted downward by the amount of any incremental shortfall in external budgetary support above US$20 million at end-September 2004, and above US$25 million at end-December, up to a maximum adjustor of US$30 million, evaluated at the program exchange rate.

7. Reporting requirement: Data on foreign assets and foreign liabilities of the NBR will be transmitted to the African Department of the IMF on a weekly basis within seven days of the end of each week; Data on the NBR's foreign exchange liabilities to commercial banks (held as required reserves with the NBR) and the exchange rate used for their conversion into Rwanda francs will be shown separately.

C. Net Credit to Government (NCG)

8. Definition: Net credit to government from the banking system is defined as the difference between:

(a) credit to government from the banking system, including credit to central government, provinces and districts, outstanding central government debt instruments; government debt to the NBR incurred as a result of the 1995 devaluation (RF 9 billion) and the overdraft to the prewar government (RF 2 billion), and

(b) total government deposits with the banking system, including central government (including the fund for assistance to genocide survivors), provinces and districts, project accounts, counterpart funds, fonds publics affectés, and privatization proceeds with the NBR. The central government comprises treasury and line ministries.

NCG is not affected by credit to or deposits of public enterprises and autonomous public agencies.

9. Reclassifications: The reclassification described in Annex B—for the reclassification of deposits with the NBR of the 15 newly identified autonomous public agencies—affect net credit to the government from the banking system.

10. Target and adjustments: The program sets a ceiling on NCG (as performance criterion or benchmark) at the test dates. In case of higher than programmed inflows of general external budgetary support, excess amounts are targeted to be saved as government deposits. The program ceiling on NCG will thus be decreased by any positive difference between actual and programmed general budgetary support inflows. The program ceiling on net credit to government will be adjusted upward by the amount of the incremental shortfall in external budgetary support above US$11 million at end-September 2004, and above US$24 million at end-December, up to a maximum adjustor of US$30 million. The NCG adjustor for budgetary support will be evaluated in Rwanda francs at the program exchange rate.

11. Reporting requirement: Data on net credit to central government (showing separately treasury bills and government bonds outstanding, other government debt, and central government deposits) will be transmitted on a monthly basis within three weeks of the end of each month. Deposits of the government with the NBR and with the commercial banks will be separated from the deposits of the public enterprises and autonomous public agencies.

D. Reserve Money

12. Definition: Reserve money for the monetary program is defined as currency in circulation, reserves in deposit money banks (excluding National Bank of Rwanda (NBR) borrowing from deposit money banks on the money market but including cash in vault held by commercial banks), deposits of public enterprises (including Caisse Sociale de Rwanda (CSR) and other autonomous public agencies (dépôts des établissements publics assimilés à l'état), deposits of nonbank financial institutions, and deposits of the private sector (autres sommes dues à la clientèle are included in reserve money).

13. Corollary: Borrowing by the NBR from the commercial banks on the money market is included under the net domestic assets of the NBR. More specifically, borrowing by the NBR from the commercial banks on the money market is netted out from commercial bank borrowing from the NBR. However, for balances with respect to deposit money banks, the money market balances of the NBR are excluded from reserve money supply when they are excluded from use in meeting reserve requirements.

14. Definition: The definition of reserve money as performance criterion or benchmark will exclude from the above definition the deposits of the Caisse d'Épargne du Rwanda (C.E.R.) with the NBR, the import deposits placed at the NBR (cautions à l'importation), and the dormant accounts. However, the import deposits are only excluded from this definition up to a maximum amount of FR 150 million, and the maximum amount for the deductible C.E.R. deposits is RF 1 billion.

15. Target and adjustments: The program sets a ceiling on reserve money (as performance criterion or benchmark) at the test dates. If the required reserve ratio of the NBR is lowered, the NBR will be expected to absorb the excess liquidity that this change creates. Therefore the reserve money target of the NBR will be adjusted by the absolute change in the ratio times the deposit base of the commercial banks.

16. Reporting requirement: Data on reserve money will be transmitted to the African Department of the IMF on a weekly basis within seven days of the end of each week. This transmission will include a weekly balance sheet of the NBR which will show all items listed above in the definitions of reserve money.

E. Broad Money

17. Definition: Broad money is defined as the sum of currency in circulation, deposits in commercial banks and nonbank deposits in the NBR. In addition, extended broad money is defined as broad money plus deposits in credit unions and credit cooperatives (UBPR), and rural and agricultural banks (BRD; other banking institutions).

18. Target: There is no performance criterion or benchmark on broad money or extended broad money but given its key influential role on inflation, they will be followed closely as indicative targets.

19. Reporting requirement: The balance sheet of the NBR will be transmitted on a weekly basis within seven days of the end of each week. The balance sheets of the commercial banks and of the other banking institutions, both for the individual institutions and for the respective sector in aggregate, and the monetary survey, will be transmitted monthly within three weeks of the end of each month. The monthly transmission will also include a monthly balance sheet for the NBR which will show all items shown also in the weekly balance sheet for the NBR.

F. Ceiling on Contracting or Guaranteeing by the Central Government, Local Governments, or the NBR of New Nonconcessional External Debt with Original Maturity of More Than One Year

20. Definition: This performance criterion applies to the contracting or guaranteeing by the central government, local governments, or the NBR of new nonconcessional external debt (as specified below) with original maturity of more than one year, including commitments contracted or guaranteed for which value has not been received. The term debt shall be understood as defined in the Executive Board decision No. 6230-(79/140) adopted August 3, 1979, as amended by Decision No. 11096-(95/100) of October 25, 1995 and Decision No. 12274-(00/85) adopted August 24, 2000. Debt rescheduling and restructuring are excluded from the criterion. Included are financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms. In determining the level of concessionality of these obligations, the definition of concessional borrowing shall apply. Concessional debt is defined as having a grant element of 50 percent or more. For loans with a maturity of at least 15 years, the 10-year average commercial interest reference rates (CIRRs) published by the OECD should be used as the discount rate for assessing the level of concessionality, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and the 6-month averages, the following margins for differing repayment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more. The performance criterion is defined to exclude the use of Fund resources.

21. In addition, loans contracted with the Arab Bank for Economic Development in Africa (BADEA) and the OPEC Fund for energy rehabilitation financing, contracted in 2002 and 2003, and supplemental BADEA lending for this project in 2004 that is intended to improve the overall concessionality of financing for the project, will evaluated using the reference interest rates prevailing in September 2002.

22. Target: The program sets a performance criterion on the ceiling on the contracting or guaranteeing by the central government, local governments, or the NBR of new nonconcessional external debt with original maturity of more than one year.

23. Reporting requirement: Details of all new external debt, including government guarantees, will be provided on a monthly basis within three weeks of the end of each month.

G. Ceiling on Change in Outstanding Stock of External Debt, Owed or Guaranteed by the Central Government, Local Governments, or the NBR with Original Maturity of Up To and Including One Year

24. Definition: The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with respect to Foreign Debt adopted on August 24, 2000. Excluded from this performance criterion are normal import-related credits. Normal import-related credits are liabilities that arise from the direct extension, during the normal course of trading, of credit from a supplier to a purchaser—that is, when payment of goods and services is made at a time that differs from the time when ownership of the underlying goods or services changes. Normal import credit arrangements covered by this exclusion will contain pre-specified limits on the amounts involved and the times at which payments must be made. Normal import credits will not involve the issuance of securities. Funding provided by an enterprise other than the supplier for the purpose of purchasing goods or services will not benefit from the exclusion under this performance criterion."

25. Target: The program sets a continuous performance criterion on the ceiling on change in the outstanding stock of external debt, owed or guaranteed by central government, local governments, or the NBR with original maturity of up to and including one year.

26. Reporting requirement: Data on debt and guarantees by central government, local governments, or NBR will be transmitted, with detailed explanations, on a monthly basis within three weeks of the end of each month.

H. Domestic Fiscal Balance

27. Definition: The domestic fiscal balance is defined as domestic revenue (excluding grants and privatization proceeds) minus current expenditure (excluding external interest due) and domestically financed capital expenditure on a payment order basis, minus net lending.

28. Target and adjustments: The program sets a ceiling on the domestic fiscal deficit, i.e., a floor on the domestic fiscal balance (as performance criterion or benchmark). As an adjustment, any shortfall in expenditure under the World Bank led demobilization and reintegration program will be used to reduce the deficit target, i.e. will be added to the target for the domestic fiscal balance. The deficit ceiling will be revised downward by the Rwanda franc equivalent of shortfalls in external budgetary grant inflows from the programmed level, evaluated at the program exchange rate, up to a maximum of US$11 million at end-September 2004 and up to a maximum of US$25 million end-December 2004. In addition, the deficit ceiling will be reduced by the amount of privatization revenue (recorded under net lending).

29. Reporting requirement: Data on domestic revenue, current expenditure, domestically financed capital expenditure and net lending will be transmitted, with detailed explanations, on a monthly basis within four weeks of the end of each month.

I. Priority Expenditure (Table 2)

30. Definition: Central government priority expenditure is defined as the sum of those outlays in the recurrent budget and of the community development fund that the government has identified as priority spending in line with the PRSP process. Table 2 provides the list of budget lines under this definition.

31. Target: The program sets a floor on priority expenditure (as performance criterion or benchmark).

32. Reporting requirement: Data on priority expenditure, at the same level of detail as in Table 2 will be transmitted on a monthly basis within three weeks of the end of each month.

J. Net Accumulation of Domestic Arrears

33. Definitions: Net accumulation of arrears for any given calendar year is defined as the difference between

gross accumulation of new domestic arrears within the calendar year of consideration, cumulative from January 1 to December 31, as measured as the difference between payment orders and actual payments, and

gross repayment during the calendar year of consideration of any arrears outstanding at 31 December of the preceding year, including repayment of the preceding year's float and repayment of older arrears in accordance with the government guidelines.

34. Target and adjustments: The program sets a ceiling on the net accumulation of domestic arrears, with a negative target thus representing a floor on net repayment (as performance criterion or benchmark). The ceiling will be reduced downward by the amount that the excess of gross accumulated bills payable above RF 1 billion at end-June, RF 1.5 billion end-September 2004, and the excess above RF 2 billion at end-December 2004.

35. Reporting requirement: Detailed data on repayment of domestic arrears and the remaining previous-year stock of arrears will be transmitted on a monthly basis within three weeks of the end of each month.

K. Stock of Outstanding Nonreschedulable External Arrears Owed by the Central Government or the NBR

36. Definition: Nonreschedulable external arrears are defined as the sum of arrears owed by the central government or the NBR to multilateral creditors and, if any, nonreschedulable arrears, to bilateral official and commercial creditors.

37. Target: The program sets a continuous performance criterion on the nonaccumulation of nonreschedulable external arrears.

38. Reporting requirement: Detailed information on repayment and/or refinancing (including the terms of refinancing) of arrears will be transmitted on a quarterly basis within three weeks of the end of each quarter. The Fund will be notified immediately in case of incurrence of any nonreschedulable external arrears.

II. Other Data requirements for Program Monitoring

A. Public Finance

39. Reporting requirement: Monthly data on external budgetary support with a breakdown of loans by creditor and grants by donor and domestic nonbank financing of the budget (including treasury bills and government bonds held by the nonbank public) will be transmitted on a monthly basis within three weeks of the end of each month; quarterly data on the implementation of the development budget with detailed information on the sources of financing will be transmitted on a quarterly basis within three weeks of the end of each quarter; public sector external and domestic scheduled debt service and payments will be transmitted on a monthly basis within three weeks of the end of each month. The Rwanda Revenue Authority will transmit any updated census results of small and medium enterprises (including the economic characteristics of these enterprises and their estimated annual sales).

B. Monetary Sector

40. Reporting requirement: The following data will be transmitted on a monthly basis within three weeks of the end of the month: the individual balance sheets and the consolidated balance sheet of deposit money banks; the individual and consolidated balance sheets of the other bank institutions; the monetary survey (situation monétaire intégrée); disaggregated data on "other items net" of the NBR and deposit money banks; required reserves and excess reserves of individual commercial banks, showing separately foreign exchange held as required reserves with the NBR; development bond and treasury bill holdings of individual commercial banks; nontreasury government deposits at individual commercial banks; nonperforming loans of individual commercial banks; required and actual provisioning of impaired assets for individual banks; capital adequacy ratio for individual commercial banks a weighted average for all commercial banks; and sanctions issued to banks.³ Data on the opening and closing balances, and debits and credits of government treasury (OTR) accounts, as well as accounts of the demobilization commission, the Rwanda Revenue Authority (RRA), Fund for Genocide Survivors (FARG), the Road Fund, the Electoral Commission and the Gacaca Commission in the central bank and commercial banks will also be communicated on a quarterly basis.

C. Public Enterprises

41. Definition: The financial statements and bank deposits of the key public enterprises (including Rwandatel, Electrogaz, Ocircafé, Ocirthé, and ONP) will be monitored under the program.

42. Reporting requirement: The financial accounts (including profit and loss accounts, balance sheets, and annual reports when published) of key public enterprises (including Rwandatel, Electrogaz, Ocircafé, Ocirthé, and ONP) will be transmitted to the African Department of the Fund within four weeks on a semi-annual basis or as the accounts become available. The statement of these enterprises' bank deposits (bank by bank) will be transmitted to the African Department of the Fund on a quarterly basis within four weeks of the end of each month.

D. External Sector

43. Reporting requirement: The following buying, selling, and average exchange rates will be transmitted on a weekly basis within seven days of the end of each week: (i) intervention exchange rates used in NBR's operations with the commercial banks; (ii) the exchange rates used in interbank transactions among the commercial banks; (iii) the average of (i) and (ii); (iv) the exchange rates for transaction in banknotes at the commercial banks; (v) the same for foreign exchange bureaus; and (vi) the parallel (black) market exchange rates. All these exchange rates will be calculated on the basis of daily buying and selling rates; the average exchange rates will be calculated on the basis of a simple average of the daily buying and selling rates. The NBR will report weekly on the difference between the parallel market rate (buying and selling) and the weighted weekly average rates of NBR intervention in the interbank market for purchases and sales, respectively.

44. The following data will be provided on a monthly basis within four weeks of the end of each month:

• The amount of foreign exchange held by commercial banks with the NBR as required reserves;
  
  
• net open foreign exchange position of each commercial bank and foreign exchange bureau, and the calculation method;
  
  
• foreign exchange intervention by the NBR on interbank market;
  
  
• imports, sales, and purchases of foreign exchange banknotes by commercial banks;
  
  
• sales and purchases of foreign exchange banknotes by foreign exchange bureaus.

Export and import data, including volumes and prices, will be transmitted on a monthly basis within four weeks of the end of each month; other balance of payments data including the data on services, official and private transfers, capital account transactions, and the repatriation of export receipts will be transmitted on a quarterly basis within four weeks of the end of each quarter.

E. Real Sector

45. Reporting requirement: Monthly disaggregated consumer price indices for Kigali (NBR), urban areas (Ministry of Finance), and rural areas (Ministry of Finance) will be transmitted on a monthly basis within four weeks of the end of each month; any revisions to gross domestic product by sector estimates will be transmitted within three weeks of the date of revision. Beginning with data for January 2004, disaggregated consumer price for a new national consumer price index will also be communicated on a monthly basis within four weeks of the end of each month.

F. Electronic Data Reporting

46. Reporting requirement: The following data will, where feasible, be made available through electronic format (Excel) and e-mailed to the African Department of the Fund:

(i) Monetary data and exchange rates:

Monthly balance sheet of the NBR, summary balance sheet of the commercial banks, individual balance sheets of the commercial banks, details of public sector deposits with commercial banks, details of commercial banks' loan provisioning and capital adequacy, monthly data on foreign exchange operations of commercial banks and the NBR, and net open foreign exchange positions. These data will be transmitted within three weeks of the end of the month.

Quarterly reporting on opening and closing balances as well as debits and credits of OTR accounts of, the demobilization commission, RRA, FARG, the Road Fund, the Electoral Commission and Gacaca Commission in the central bank and commercial banks.

Weekly balance sheet of the NBR will be transmitted within seven days of the end of each week.

Weekly data on NBR interventions on the money market (appel d'offres) both to inject and to absorb liquidity, including the maturity and the due date of the transactions, the amounts offered, demanded, and allocated (by bank, in millions of Rwanda francs), the maximum, minimum, marginal, and average interest rates offered, and the interest payments (by bank, in Rwanda francs). These data will be made available within seven days after the end of the week.

Weekly data on recourse to the discount window (prise en pension), including the period of borrowing, the discount rate, and the amount (by bank, in Rwanda francs). These data will be made available within seven days after the end of the week.

Weekly update of the monthly treasury plan (plan de trésorérie) for foreign exchange reserves at the NBR. These data will be made available within seven days after the end of the week.

Weekly data on exchange rates, including foreign exchange auctions by the NBR, the amount of foreign exchange offered, demanded, and allocated (by commercial bank, in U.S. dollars and Rwanda francs), and the minimum, maximum, marginal, and average exchange rate offered. These data will be made available within seven days after the end of the week.

Daily balance by commercial bank of amounts outstanding from money market interventions to absorb liquidity (appel d'offres-ponction), to inject liquidity (appel d'offres-injection), under the discount window (prise en pension) and any other credit facility of the NBR, respectively. These data will be made available within seven days of the reported date.

Weekly balance of the subaccount for HIPC Initiative assistance from the IMF at the NBR. The data will be provided within seven days of the end of the week.

(ii) Fiscal "flash" report, including detailed lists of priority and exceptional expenditure. These data will be transmitted within four weeks of the end of the month.

(iii) Detailed export and import data; and

(iv) Detailed CPI data.

III. Program Monitoring Committee

47. Definition: The Interministerial Technical Committee, composed of senior officials of key ministries and the National Bank of Rwanda shall meet once a month and be responsible for monitoring the performance under the program, informing the IMF staff regularly about progress on program implementation, and transmitting supporting information necessary for program monitoring.

48. Reporting requirement: The names of the Interministerial Technical Committee shall be communicated to the IMF no later than the date of submission of the authorities' request for support of the three-year PRGF-supported program to the Executive Board of the IMF or the start of a new annual arrangement. The Interministerial Technical Committee shall provide to the IMF staff a progress report on the program implementation on a monthly basis within four weeks of the end of each month.

Annex B. Reclassifications

The following reclassification of data has been made to the monetary survey:

Reclassification of the deposits of 15 additional autonomous public agencies: In tables presented by the IMF prior to November 5, 2000, deposits of the central government with the NBR included deposits of 15 autonomous agencies. As of November 6, 2000 these deposits will be itemized separately in a category called "public nongovernment deposits," but will still be included in the domestic credit of the NBR.

Table 1. Rwanda: Summary of Reporting Requirements
Status	Variable or Table	Reporting Frequency	Reporting Delay from End of Period Covered	Report Data Electronically
	A. Monetary and Foreign Exchange
PC	Net foreign assets National Bank of Rwanda (NBR)	Weekly	Seven days	Yes
PC	Reserve money	Weekly	Seven days	Yes
PC	Net credit to central government	Monthly	Three weeks	Yes
Table	Monthly balance sheet of the NBR	Monthly	Three weeks	Yes
Table	Summary balance sheet of the commercial banks	Monthly	Three weeks	Yes
Table	Individual balance sheets of the commercial banks	Monthly	Three weeks	Yes
Table	Details of public sector deposits with individual commercial banks	Quarterly	Three weeks	Yes
Table	Opening and closing balances as well as debits and credits for OTR accounts, the demobilization commission, Rwanda Revenue Authority (RRA), Victims of Genocide Fund (FARG), the Road Fund, and Gacaca in the central bank and commercial banks;	Quarterly	Three weeks	Yes
Table	Details of commercial banks' loan provisioning and capital adequacy	Monthly	Three weeks	Yes
Table	Monthly data on foreign exchange operations of commercial banks, the NBR, and foreign exchange bureaus	Monthly	Three weeks	Yes
Table	Net open foreign exchange positions of commercial banks and foreign exchange bureaus	Monthly	Three weeks	Yes
Table	Exchange rates	Weekly	Seven days	Yes
	B. Debt
PC	New external government borrowing	Monthly	Three weeks
PC	Stock of short-term external government debt	Monthly	Three weeks
	C. Fiscal
PC	Domestic arrears (repayment of the end-of-year stock of arrears and accumulation of new arrears)	Monthly	Three weeks	Yes
PC	External arrears	. . .1	. . .	Yes
OV	External budgetary support with a break down between of loans by creditor and grants by donors.	Monthly	Three weeks	Yes
Table	Fiscal data (revenue, expenditure,2 priority expenditure, exceptional expenditure, wage bill)	Monthly	Three weeks	Yes
Table	Development budget implementation	Quarterly	Three weeks	Yes
Table	Scheduled debt service and payments	Quarterly	Four weeks	Yes
	D. Public enterprises
Table	Public enterprises financial statements	Semiannual	Four weeks
Table	Public enterprises bank deposits	Quarterly	Four weeks
Table	Estimated and actual tax payments of the public enterprises	Quarterly	Four weeks
	E. Civil service
OV	Size of the civil service (core civil service and teachers)	Monthly	Three weeks	Yes
	F. Balance of payments
Table	Export and imports	Monthly	Four weeks	Yes
Table	Detailed Balance of Payments	Quarterly	Four weeks
	G. Prices
OV	CPI Kigali (NBR), urban, and rural (Minecofin)	Monthly	Four weeks	Yes
1The authorities will notify immediately the Fund in case of incurrence of any nonreschedulable external arrears. 2On commitment basis (engagement) and on payment order basis (ordonnancement); the provision of fiscal data is based on the "flash" reporting (aggregate and by ministry). PC = performance criterion or quantitative benchmark. QI = quantitative indicator. OV= other variable.

Table 2. Rwanda: Recurrent and Capital Priority Expenditure, 20031 (In millions of Rwanda francs)
		2003
Internal affairs		4,739
	National police services	4,103
	Prisons	636
Agriculture		2,142
	Agricultural production	1,000
	Livestock production	686
	Forestry resources	192
	Soil conservation and water systems management	92
	Agricultural extension and marketing	172
Commerce		768
	Promotion of trade and commerce	34
	Industrial development and artisanal promotion	522
	Export promotion	212
Education		12,879
	Pre-primary and primary education	1,849
	Secondary education	853
	Tertiary education	8,019
	Scientific and technological research	605
	Institutional support	1,552
Youth and Sports		420
	Youth mobilization	53
	Cultural promotion	172
	Research, acquisition, and conservation of the national heritage	196
Health		4,601
	Primary health care	1,431
	Specialist care for major health problems	2,359
	Development of health structures	392
	Improvement in health management services	419
Transport and communication, energy and water resources		3,313
	Development and modernization of communication infrastructures	340
	Improvement in transport services	208
	Rationalization and management of urban land	113
	Development of transport infrastructure 2	2,275
	Energy	45
	Water and sanitation	150
	Mining and other geological programs	80
	Methane gas unit	103
Gender		286
	Support programs for promotion and development of women	178
	Promotion of gender in development	52
	Promotion of socio-economic equity	57
Public service		501
	Civil service reform	374
	Employment and social security promotion	127
Lands and resettlement		684
	Land planning and management	377
	Planning and supervision of housing amenities	193
	Conservation and protection of the environment	113
Local government (excluding exceptional expenditure)		6,448
	Decentralization	249
	Community development	565
	Social reinsertion	49
	Family rehabilitation	14
	Mass education	27
	Promotion of children's rights	18
	Decentralization (district transfers in recurrent budget)	1,526
	Common development fund (district transfers in development budget)3	4,000
Provinces		23,416
Total recurrent		56,196
Total		60,196
Source: Rwandese authorities. 1All programs are classified as recurrent expenditures, except where marked. 2Includes Road Fund. 3As part of capital expenditure.

Table 3. Rwanda: Composition of Exceptional Expenditure, 2003 (In millions of Rwanda francs)
		2003
Demobilization/Reintegration/Reinsertion		13,711
Supplies for prisoners		1,352
Gacaca1
	Gacaca Sensibilization, Ministry of Justice	306
	Health insurance Gacaca members	479
	Gacaca jurisdictions	1,346
Victims of Genocide Fund (FARG)		5,895
Orphans assistance		448
Assistance to vulnerable groups		374
Reinsertion of vulnerable groups		6
Support to local initiatives (education)		61
Support to orphanages and ENA		87
Reinsertion of displaced groups from Gishwati		180
Reinsertion of street children		48
CFJM operation		1
Good governance commissions
	Human Rights National Commission	730
	Constitutional Commission	658
	Commission for Unity and Reconciliation	569
	Electoral Commission/Referendum/Elections	7,306
	Office of the Ombudsman	168
National Commission for the Fight Against AIDS		215
Educational institutes
	KIST (Kigali Institute for Science and Technology)	1,952
	KHI (Kigali Health Institute)	556
	KIE (Kigali Institute of Education)	1,335
Special exceptional road works		1,000
Special exceptional health expenditure		3,015
Total		41,797
Source: Rwandese authorities. 1Gacaca: Community justice initiative.