IMF Executive Board Completes First Review Under the Policy Coordination Instrument (PCI) and Monetary Policy Consultation for Rwanda
January 17, 2020
- Rwanda’s macroeconomic performance under the program remains strong.
- The PCI-supported program focuses on creating budget space for the implementation of Rwanda’s National Strategy for Transformation.
- The program also calls for improving fiscal transparency, boosting revenue, and supporting the implementation of the new interest rate-based monetary policy framework.
On January 9, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the first review of Rwanda’s program supported by the IMF’s Policy Consultation Instrument (PCI). The decision was taken without an Executive Board meeting. [1]
Rwanda’s PCI-supported program was approved on June 28, 2019 ( Press Release No.19/258 ) to support the implementation of Rwanda’s National Strategy for Transformation (NST). Program modalities focuses on four main pillars: (i) creating budget space for the implementation of the NST while preserving fiscal and debt sustainability; (ii) improving fiscal transparency, including the identification and management of potential government liabilities, (iii) regaining momentum on domestic revenue mobilization; and (iv) supporting the implementation of the National Bank of Rwanda (BNR)’s new interest rate-based monetary policy framework.
Rwanda’s macroeconomic performance under the program remains strong. Growth continues to beat expectations, averaging 10.3 percent in the first half of 2019, on the back of a booming construction sector, robust activity in services, and a healthy agricultural output. As a result, the 2019 growth projection has been revised up from 7.8 to 8.5 percent, with strong upside risk—especially given the recently released GDP figures suggesting that the economy grew in double digits in Q3 2019. The fiscal deficit in 2018/19 was higher-than-expected due to accelerated implementation of investment spending; but remained within the program limits. This, combined with stronger demand for the capital-goods imports needed for construction, has led to a widening of the current account deficit. Growth should remain strong, at around 8 percent, over the next 2–3 years.
After a period of subdued price pressure, inflation has come back within the BNR’s and the PCI’s Monetary Policy Consultation Clause (MPCC) targeted range partly reflecting stronger domestic demand and dissipating base effects. [2] BNR has appropriately set the monetary stance by reducing interest rates at the trough of the inflation cycle in May and has since refrained from further easing as price dynamics reversed. Headline inflation is expected to peak in end-2019/early-2020 and should subsequently ease toward the mid-point of the authorities’ target band. The BNR remains committed to take action should trends deviate from expectations.
Looking ahead, the fiscal deficit path is forecasted to adhere to the fiscal rule under the program, which provides space for the implementation of the NST while safeguarding debt sustainability. [3] The government plans to finance the NST partly through public borrowing, which should continue to be supported by careful debt management. There are a number of plans underway to increase domestic revenues by boosting the registration of new taxpayers as well as through innovative schemes and greater use of technology to strengthen tax compliance. Further progress on identifying and managing potential government liabilities—so called fiscal risks—will be important to ensure that public resources are well protected for use on priority spending.
The BNR continues to make progress in implementing its new interest-based monetary policy framework. Domestic liquidity pressures over the summer were met through increased activity on the interbank market and use of the BNR’s reverse repo facility. There are signs that interest rate channels are strengthening, with shorter term interest rates converging and longer-term interest rates declining slightly. Further steps to develop money markets will be needed to strengthen the new framework, along with stronger forecasting capacity and an upgraded communication strategy.
The government continues to promote private sector activity and boost
productivity with encouraging results so far. A successful transition to a
private sector-led growth and higher productivity will be important for
sustaining Rwanda’s high growth while maintaining macroeconomic balances.
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Table 1. Rwanda: Selected Economic Indicators, 2018–21 |
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|
2018 |
2019 |
2020 |
2021 |
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|
Prel. |
Prog. |
Proj. |
Prog. |
Proj. |
Prog. |
Proj. |
|
|
(Annual percentage change, unless otherwise indicated) |
|||||||
|
Output and prices |
|||||||
|
Real GDP |
8.6 |
7.8 |
8.5 |
8.1 |
8.0 |
8.2 |
8.0 |
|
GDP deflator |
-0.8 |
4.2 |
1.8 |
5.0 |
5.6 |
5.0 |
5.0 |
|
CPI (period average) |
1.4 |
3.5 |
2.3 |
5.0 |
5.4 |
5.0 |
5.0 |
|
CPI (end period) |
1.1 |
5.0 |
5.7 |
5.0 |
5.0 |
5.0 |
5.0 |
|
Terms of trade (deterioration, -) |
-0.7 |
0.7 |
-1.8 |
0.1 |
-0.1 |
0.2 |
0.0 |
|
Money and credit |
|||||||
|
Broad money (M3) |
15.6 |
19.8 |
21.8 |
20.0 |
21.9 |
17.7 |
17.4 |
|
Reserve money |
16.1 |
17.2 |
21.5 |
17.9 |
22.1 |
15.7 |
17.8 |
|
Credit to non-government sector |
10.8 |
12.8 |
17.6 |
14.3 |
14.8 |
13.9 |
7.9 |
|
M3/GDP (percent) |
25.3 |
27.0 |
27.9 |
28.5 |
29.8 |
29.5 |
30.9 |
|
NPLs (percent of total gross loans) |
6.4 |
… |
… |
… |
… |
… |
… |
|
Budgetary central government |
(Percent of GDP, unless otherwise indicated) |
||||||
|
Total revenue and grants |
24.1 |
23.1 |
23.6 |
22.2 |
23.1 |
21.6 |
22.9 |
|
of which : tax revenue |
16.2 |
16.1 |
16.6 |
16.3 |
16.9 |
16.1 |
16.5 |
|
of which : grants |
4.9 |
4.8 |
4.5 |
3.9 |
4.1 |
3.4 |
4.3 |
|
Expenditure |
28.8 |
29.2 |
31.9 |
28.6 |
29.0 |
27.8 |
29.2 |
|
Current |
15.3 |
14.7 |
15.9 |
13.9 |
14.5 |
13.7 |
14.6 |
|
Capital |
11.5 |
12.0 |
12.7 |
12.3 |
12.1 |
12.1 |
12.7 |
|
Primary balance |
-3.5 |
-4.9 |
-6.9 |
-5.0 |
-4.2 |
-4.8 |
-4.9 |
|
Overall balance |
-4.7 |
-6.1 |
-8.2 |
-6.4 |
-5.9 |
-6.2 |
-6.3 |
|
excluding grants |
-9.6 |
-10.9 |
-12.7 |
-10.4 |
-10.0 |
-9.6 |
-10.6 |
|
Debt-creating overall bal.(exc. PKO)1 |
-5.0 |
-6.0 |
-6.7 |
-6.3 |
-5.7 |
-6.4 |
-6.4 |
|
Net domestic borrowing |
0.0 |
2.0 |
2.7 |
0.8 |
0.7 |
1.1 |
2.0 |
|
Public debt |
|||||||
|
Total public debt incl. guarantees |
53.1 |
55.8 |
59.0 |
57.3 |
58.9 |
58.2 |
59.8 |
|
of which : external public debt |
41.6 |
43.4 |
46.0 |
44.6 |
48.1 |
45.5 |
49.8 |
|
PV of total public debt incl. guarantees |
40.9 |
42.5 |
44.5 |
42.9 |
43.1 |
42.7 |
42.9 |
|
Investment and savings |
|||||||
|
Investment |
24.4 |
27.7 |
28.4 |
28.4 |
28.2 |
28.2 |
28.8 |
|
Government |
11.5 |
12.0 |
12.7 |
12.3 |
12.1 |
12.1 |
12.7 |
|
Nongovernment |
12.9 |
15.7 |
15.7 |
16.1 |
16.1 |
16.1 |
16.1 |
|
Savings |
12.9 |
14.6 |
14.6 |
16.4 |
15.5 |
18.0 |
16.6 |
|
Government |
4.0 |
3.6 |
3.3 |
4.3 |
4.5 |
4.5 |
4.0 |
|
Nongovernment |
8.9 |
11.1 |
11.2 |
12.1 |
11.1 |
13.5 |
12.6 |
|
External sector |
|||||||
|
Exports (goods and services) |
21.5 |
21.2 |
21.5 |
21.4 |
21.8 |
22.1 |
22.6 |
|
Imports (goods and services) |
33.1 |
33.6 |
34.9 |
32.8 |
34.1 |
31.8 |
34.3 |
|
Current account balance (incl grants) |
-7.9 |
-9.6 |
-10.6 |
-9.4 |
-9.9 |
-7.9 |
-9.1 |
|
Current account balance (excl grants) |
-11.5 |
-13.1 |
-13.9 |
-12.0 |
-12.7 |
-10.2 |
-12.2 |
|
Current account balance (excl. large projects) |
-7.4 |
-9.0 |
-10.4 |
-8.3 |
-8.9 |
-7.4 |
-8.2 |
|
Gross international reserves |
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|
In millions of US$ |
1,319 |
1,428 |
1,367 |
1,566 |
1.553 |
1,637 |
1,654 |
|
In months of next year's imports |
4.5 |
4.7 |
4.4 |
4.9 |
4.6 |
4.7 |
4.6 |
|
Memorandum items: |
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|
GDP at current market prices |
|||||||
|
Rwanda francs (billion) |
8,189 |
9,199 |
9,045 |
10,442 |
10,313 |
11,866 |
11,688 |
|
Population (million) |
12.1 |
12.4 |
12.4 |
12.7 |
12.7 |
13.0 |
13.0 |
|
Sources: Rwandan authorities and IMF staff estimates. 1/ Overall deficit excl. spending on materialized contingent liabilities and other items already included in the DSA. |
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[1] The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.
[2] The BNR’s targeted range corresponds to ± 3 percentage point range around the BNR’s 5 percent target for the headline inflation averaged for the past 12-month. Under the PCI’s MPCC, a consultation with the Executive Board is required if headline inflation, as previously defined, falls outside ± 4 percentage point around the BNR’s target for given test dates. This consultation focuses on (i) the appropriateness of the monetary stance and whether the Fund-supported program remains on track, (ii) the reasons for program deviation, and (iii) proposed remedial actions, if deemed necessary. Headline inflation was below the lower bounds of both the BNR’s target band the PCI’s MPCC at end-June 2019, one of the program test dates.
[3] The fiscal rule under the program corresponds to a fiscal deficit limit of 5.5 percent on average over a rolling 5-year window.
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