Press Release No. 14/564

Press Release: IMF Executive Board Completes Second PSI Review for Rwanda and Concludes 2014 Article IV Consultation

December 10, 2014

On December 8, 2014 the Executive Board of the International Monetary Fund completed the second review of Rwanda’s economic performance under the program supported by the Policy Support Instrument (PSI)¹ and also concluded the 2014 Article IV consultation² with Rwanda.

The PSI for Rwanda was approved on December 2, 2013 (see Press Release No.13/483).

Following the Board discussion, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, made the following statement:

“The Rwandan authorities are to be commended for their strong implementation of the economic program supported by the Policy Support Instrument, carried out against a challenging economic environment. Poverty has declined over time, economic growth has recovered since 2013, and inflation remains contained.

“Fiscal policies remain prudent and the objectives of the FY2014/15 budget are within reach. In the medium term, fiscal deficits are projected to decline with limited recourse to domestic financing. Strengthening the domestic revenue base is an important objective, including for reducing aid dependency, and the authorities should vigorously pursue improvements in revenue administration and tax policy improvements in agriculture, mining, and property.

“The central bank’s current monetary policy stance is appropriate in view of rising inflationary pressures and the more flexible monetary policy framework will serve to make monetary policy implementation more effective. However, stepped-up efforts are needed to better promote financial deepening and inclusion, including through implementation of the Financial Sector Development Plan, and to enhance domestic and cross-border financial supervisory and regulatory frameworks.

“The government has taken important steps to strengthen Rwanda’s debt management capacity and project implementation, including establishment of a Debt Management Unit. The available room to fund new infrastructure projects and maintain a low risk of debt distress is limited, and sensitive to changing economic circumstances. This requires consistent and prudent debt management, through exploring all available concessional financing options, private sector involvement and judicious use of non-concessional borrowing.

“Removal of remaining structural impediments to private sector investment will help foster greater regional integration and export diversification. Efforts are needed to strengthen the business environment, including by lowering business costs and reducing remaining trade barriers”.

The Executive Board also completed the 2014 Article IV Consultation with Rwanda.

Rwanda’s economic performance since the turn of the century has been remarkable. Strong policies have played a key role in maintaining Real Gross Domestic Product (GDP) growth at 7.8 percent on average since 2000, with significant poverty reduction. The economy is recovering from the disruptions induced by aid suspension through mid-2013, with growth bouncing back in the first half of 2014 and inflation well contained.

The fiscal deficit for the fiscal year 2014/15 continues to be in line with available resources. Tax revenue is expected to increase by 1 percent of GDP this fiscal year, bringing it to almost 16 percent of GDP. Continued efforts to mobilize more domestic revenue should allow Rwanda to reduce its reliance on donor resources and finance its ambitious development agenda.

The monetary stance has remained unchanged since mid-2014 and is consistent with the projected pick-up in inflation and improved growth outlook. The National Bank of Rwanda (NBR) has implemented a series of measures aimed at improving the transmission mechanism of monetary policy and allowed greater exchange rate flexibility to maintain reserves at adequate levels.

Growth in 2014 is expected to be about 6 percent, rising to the longer-term growth rate of 7.5 percent in the medium term. This reflects improved implementation of government projects and a rebound in agriculture because of favorable climatic conditions early in the year. Prospects in construction and real estate are also favorable. Inflation is projected at about 3 percent by end year, converging to the authorities’ target of 5 percent in the medium term.

In terms of risks, weather conditions and delayed project implementation would hinder growth prospects, and a protracted period of slower growth in advanced economies or a decline in commodity prices - minerals and traditional exports - would adversely affect exports.

Executive Board Assessment³

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Rwanda’s continued strong performance under the PSI-supported program, which has led to progress towards macroeconomic stability; robust, sustained and inclusive growth; improved gender equity; and poverty reduction. Despite strong program performance and the favorable economic outlook, Directors noted the country’s vulnerability to external shocks and high aid dependency, and encouraged the authorities to sustain the reform momentum. They supported the creation of an enabling environment for successful economic transformation to a more diversified, private-sector-led growth strategy, through macroeconomic prudence and productivity and competitiveness-enhancing structural reforms.

Directors called for continued efforts to strengthen fiscal sustainability through enhanced revenue mobilization and reduced foreign aid dependency. They recommended improvements in tax administration and broadening the tax base with Fund technical assistance, including through tax policy measures in agriculture, mining and property. On the expenditure side, Directors welcomed the identification of specific contingent cuts for FY2014/15, which safeguard priority social spending, in the event of revenue shortfalls. They also encouraged ongoing efforts to strengthen public financial management.

Directors considered the current monetary policy stance appropriate in view of rising inflationary pressures. However, they encouraged the authorities to improve the effectiveness of the monetary transmission mechanism, through the development of deeper financial markets and new monetary instruments. Directors called for the implementation of the Financial Sector Development Plan, to further promote financial deepening and inclusion. They advised strengthening both domestic and cross-border financial supervisory and regulatory frameworks, and improving the AML/CFT regime.

Directors agreed that Rwanda’s real exchange rate remains broadly in line with economic fundamentals, and underscored the need to maintain exchange rate flexibility to reduce external imbalances and preserve foreign exchange buffers.

Directors welcomed the establishment of the new Debt Management Unit, and supported the authorities’ plans to develop the country’s project implementation capacity, guided by a well-prioritized and appropriately phased public investment plan. They noted the authorities’ commitment to fully explore concessional financing options and private sector participation, and called for careful management of non-concessional borrowing to mitigate rollover risks.

Directors advised the removal of remaining structural impediments to private sector investment, and encouraged greater regional integration and export diversification. They recommended improving the business environment, including by lowering business costs and reducing remaining trade barriers.