The Executive Board of the International Monetary Fund (IMF) today
completed the sixth review of Rwanda’s performance under the Policy Support
Instrument (PSI)
[1]
and the first review of the arrangement under the Standby Credit Facility
(SCF)
[2]
. The Board’s decision was taken on a lapse of time basis. [3]
Requests for an 18-month SCF arrangement with access of about US$204
million (SDR 144.18 million) or 90 percent of Rwanda’s quota and to extend
Rwanda’s PSI-supported program through end-2017 (see
Press Release No. 16/270
), were approved by the Board on June 8, 2016. Half was disbursed upon
approval of the SCF arrangement, and with completion of the first review of
the SCF arrangement another US$48.65 million (SDR 36.045 million) becomes
available for disbursement. The remaining financing will be considered in
two subsequent reviews in 2017. Rwanda’s PSI-supported program was
originally approved on December 2, 2013 (see
Press Release No.13/483
). In completing the reviews, the Board also approved modification of
end-December 2016 program targets (to reflect new information on external
assistance) and granted a waiver for a minor and temporary non-observance
of the continuous zero limit on external arrears accumulation.
The main near-term objective of the current programs is to respond to
adverse global developments, most notably commodity prices, which has led
to growing external imbalances, resulting in pressure on the Rwandan franc
and the banking system’s foreign exchange reserves. Restoring external
sustainability is imperative for realization of medium-term program
objectives, namely sustained high and inclusive growth, including through
public infrastructure investment, and reduced dependence on donor support
through higher domestic revenues.
Early evidence suggests that the short term adjustment policies have been
effective in addressing external imbalances. The authorities have continued
to allow exchange rate flexibility to serve as the main policy adjustment
instrument, with depreciation of 9 percent over the first 10 months of
2016, complemented by modest fiscal consolidation and monetary tightening.
These demand management policies have been accompanied by the government’s
home-grown “Made in Rwanda” initiative, which seeks to substitute domestic
production for some key imported goods, and export promotion efforts.
Performance under the program has been strong, with almost all program
targets set through end-June 2016 and structural reforms through
end-September 2016 being achieved.
The agreed policy mix remains appropriate for safeguarding external and
fiscal sustainability, while supporting growth objectives. If current
trends continue, the current account deficit should fall over the course of
2017-18, bringing official reserves above 4 months of imports. The
authorities have acted decisively to address growing external imbalances
and thereby should avoid more painful adjustment that otherwise would have
been needed, as illustrated by the experience of some other countries
adversely affected by commodity prices.
Inflation pressure is currently supply driven with end-year inflation
projections of 6.0 percent and 5 percent over the medium term. But the
situation should be monitored closely to assess potential second-round
effects of the inflationary impact of a depreciated exchange rate, and more
monetary tightening may be needed if inflation pressures are greater than
projected. Clearer communication regarding the policy stance could help
steer inflation expectations. Decisive efforts would be needed to develop
minimum conditions for inflation targeting within the agreed East African
Community timeline.
Looking ahead, risks to the growth outlook are balanced. The government’s
deliberate incentives to promote domestic production and add value to its
exports should keep growth buoyant. However, should the drought be
prolonged, both growth and inflation could be adversely affected.
[1]
The PSI is an instrument of the IMF designed for countries that do
not need balance of payments financial support. The PSI helps
countries design effective economic programs that, once approved by
the IMF's Executive Board, signal to donors, multilateral
development banks, and markets the Fund's endorsement of a member's
policies (see
http://www.imf.org/external/np/exr/facts/psi.htm
). Details on Rwanda’s current PSI are available at www.imf.org/rwanda.
[3]
The Executive Board takes decisions without a meeting when it is
agreed by the Board that a proposal can be considered without
convening formal discussions.