Public Information Notice No. 01/31

Public Information Notice: IMF Concludes Article IV Consultation with Rwanda

March 27, 2001

On December 20, 2000, the Executive Board concluded the Article IV consultation with Rwanda.¹

Background

Real GDP growth decelerated to an estimated 5.2 percent in 2000, from 5.9 percent in 1999, on account of drought in some areas, the rise in international petroleum prices and transportation costs, as well as lower economic activity in the subregion. After posting a period average inflation rate of negative 2.4 percent in 1999, Rwanda's inflation increased to 2.8 percent by September 2000, partly on account of higher fuel prices. The external current account deficit widened from about 15.3 percent of GDP in 1999 to 16.8 percent of GDP in 2000, reflecting weaker coffee export receipts, higher fuel and food import prices, an increase in international transport costs, and a relaxation of monetary policy. In this context, the currency depreciated and the central bank sold significant amounts of foreign exchange reserves to restrain the depreciation. While this meant that the net foreign asset targets of the central bank were not met, Rwanda's gross official reserves remained comfortable at over six months of imports.

The government reduced its primary fiscal deficit, but the outturn fell somewhat short of the program targets in the first nine months of 2000 despite some remedial measures that the authorities adopted. In response to revenues being lower than targeted by RF 5.2 billion (0.7 percent of annual GDP), the government reduced expenditure (mostly nonsocial spending) by about RF 3.8 billion (0.5 percent of GDP) below the September 2000 target. With a view to attaining a primary fiscal deficit of negative 0.1 percent of GDP for 2000, which is close to the original program target, the government adopted new revenue measures to contain the revenue shortfall and implemented expenditure cuts in the nonsocial areas. Recurrent social spending is thus expected to increase to 4.1 percent of GDP (from 3.9 percent in 1999) and defense spending to decline to 3.8 percent of GDP (from 4.1 percent in 1999).

In 2000, the government undertook an investigation with a view to identifying all outstanding domestic arrears. The authorities identified up to RF 27 billion in arrears (about 4 percent of GDP) with a majority of these incurred before or during the 1994 war. Disruption in the recording system, weaknesses in expenditure control, and the lack of clear guidelines on responsibilities for certain public expenditures were responsible for these arrears. However, as a significant number of the arrears may not be legitimate, the government will seek verification by a third party, and has committed to eliminating all verified arrears by end-2002. Moreover, measures are being put in place to prevent the reemergence of arrears in the future.

In 2001, the authorities will aim to limit the overall fiscal deficit to 9.6 percent of GDP and achieve a primary fiscal surplus of 0.2 percent of GDP. To attain the 2001 fiscal targets the budget includes important revenue measures, which are projected to improve revenues by about 0.6 percentage points of GDP to 10.9 percent of GDP. Government expenditure will increase to 20.5 percent of GDP in 2001 from 19.6 percent of GDP in 2000, reflecting increases in antipoverty spending to 4.9 percent of GDP (from 4.1 percent in 2000) and capital expenditure to 7.6 percent of GDP (from 7 percent in 2000), while military spending will be reduced to 3.2 percent of GDP (from 3.8 percent in 2000). The monetary program for 2001 is consistent with a 6 percent real GDP growth, 3 percent inflation, and a significant expansion in bank credit to the private sector.

The medium-term macroeconomic strategy of the authorities aims to gradually reduce Rwanda's current account deficits, arrest the deterioration in debt sustainability indicators, and thus decrease uncertainty about the sustainability of macroeconomic stability, and eventually integrate Rwanda into international capital markets. In this context, the authorities will aim to reduce the fiscal deficit from 9.6 percent of GDP in 2001 to about 7.8 percent by 2004, mainly on the basis of steps to improve revenue performance. Despite a projected improvement of the current account, a very significant share of grants in total foreign financing will be needed for a number of years in order to achieve debt sustainability.

Executive Board Assessment

Executive Directors noted the further progress made in 1999-2000—as evidenced by the continued low inflation and relatively robust economic growth—but raised concern about missed macroeconomic policy targets despite the remedial measures taken by the authorities. Directors emphasized the need to address the causes of deviations from policy targets urgently in 2001.

Directors noted that the fiscal program of the authorities for 2001 includes a broad range of measures—such as widening the tax base and improving customs administration, addressing issues of fraud, evasion, and corruption, and implementing the VAT—all of which are aimed at strengthening Rwanda's revenue collection capacity. Directors encouraged the authorities to strictly enforce these measures together with the existing tax laws and regulations, as this would facilitate achievement of the revenue targets of the 2001 budget. They urged the authorities to strengthen the Rwanda Revenue Authority.

Directors welcomed the large increase and improved composition of antipoverty expenditures envisaged for 2001, which in part is to be achieved through reallocation of resources from defense expenditure—in line with commitments of the authorities to reduce defense expenditure over the medium term. Directors encouraged the authorities to monitor carefully expenditures, and especially to track the use of resources that are freed up as a result of HIPC debt relief.

Directors encouraged the authorities to bring about greater transparency in government operations. They stressed that good governance is critical for the management of public finances and for achieving Rwanda's development and antipoverty objectives, and urged the authorities to implement the wide range of measures envisaged in this area. In this regard, Directors expressed concern over the extrabudgetary expenditures, especially those relating to military spending, and welcomed the authorities' intention to bring them into the 2002 budget. Directors welcomed the strengthening of the office of the Auditor General, the audits of the four ministries, and the closure of the bank accounts of ministries as important steps in improving fiscal governance.

Directors noted the authorities' efforts to address the domestic arrears problem, and welcomed their commitment to implement reforms in budget implementation, including monitoring and control of expenditure to avoid the reemergence of arrears.

Directors also commended the authorities for introducing their first Medium-Term Expenditure Framework (MTEF) (including a new functional budget classification) with the 2001 budget. They urged the government to continue its efforts to improve the MTEF, including by linking it with the recommendations arising from the PRSP process.

Directors urged the National Bank of Rwanda (NBR) to expand its monetary policy instruments and use them more actively toward achieving its monetary policy targets. They welcomed the decision of the NBR to introduce a system of auctions of foreign exchange and urged the authorities to implement the new system without delay.

Directors stressed the need to accelerate structural reforms, as these are essential for diversifying the economy and enhancing its supply response. In the civil service area, they encouraged the authorities to complete reforms that are under way and to limit new recruitment to the replacement of unqualified staff, other than meeting the needs of the social/antipoverty and justice areas. They also noted the importance of an early adoption of the civil servants' code. Directors underscored the need for the government to proceed rapidly with its plan for privatization of the telecommunications and electricity companies and tea estates, as well as to implement a privatization plan for other public enterprises.

Directors commended the authorities' efforts in improving the soundness of the financial system and stressed the need to further strengthen the central bank's supervisory capacity, improve nonperforming loan recovery, and restructure the savings and loan cooperatives.

Directors noted that the authorities' medium-term macroeconomic framework is consistent with the goal of achieving high sustainable economic growth and poverty reduction. In this context, they welcomed the authorities' aim to put in place a macroeconomic framework that reduces the fiscal and external imbalances over time, preserves the debt sustainability that would be provided via application of the enhanced HIPC Initiative, and promotes private sector savings and investment, while increasing antipoverty spending and investment in both physical and human capital.

Directors noted that there are important data weaknesses with regard to most macroeconomic statistics and sociodemographic indicators, and urged the authorities to make improvements in this area a priority. They thus encouraged the authorities to expedite the implementation of the recommendations made by recent Fund statistics missions.