Press Release No. 21/123

IMF Staff Completes Review Mission to Rwanda

May 6, 2021

• IMF staff reached staff-level agreement on policies needed to complete the fourth review under the Policy Coordination Instrument (PCI).
• Growth is projected to rebound to 5.1 percent in 2021, compared to a contraction by 3.4 percent last year due to the COVID-19 pandemic. The rebound comes as vaccines are rolled out and the government continues to support the economy and people through the Economic Recovery Plan.
• To mitigate the risks to the outlook exacerbated by the COVID-19 pandemic, fiscal policy will need to balance debt sustainability with supporting the recovery and growth. Implementation of structural reforms needs to be fast-tracked, including strengthening fiscal risk management to foster inclusive growth and mitigate debt-related risks.

Washington, DC: An International Monetary Fund (IMF) mission, led by Haimanot Teferra, held virtual meetings with the Rwandan authorities during March 22 – May 6, 2021, to discuss the fourth review of Rwanda’s Policy Coordination Instrument (PCI)-supported program. [1] At the conclusion of the mission, Ms. Teferra issued the following statement:

“The IMF mission held productive discussions with the authorities and reached staff-level agreement on policies needed to complete the fourth review under the PCI. The successful completion of the review is subject to approval by the IMF Executive Board. Consideration by the Board is tentatively scheduled for end-June 2021.

“Rwanda continues to grapple with the fallout from the COVID-19 pandemic. Economic activity contracted by 3.4 percent in 2020. While a second wave of infections led to a three-week lockdown in Kigali in early 2021, a gradual lifting of restrictions is currently underway. Growth is projected to rebound to 5.1 percent in 2021, supported by the national vaccination campaign targeting 60 percent of the population by end-June 2022 and continued government support to hard-hit businesses and vulnerable households. However, downside risks to growth remain substantial owing to uncertainties surrounding the duration and impact of the pandemic, and the availability of vaccines.

“The fiscal deficit in the first half of FY20/21 was larger than anticipated owing to the accelerated execution of schools construction and the timing of budget support disbursements, despite revenue overperformance. Headline inflation reached 2 percent year-on-year in March, mainly driven by the decline in food prices, and is expected to remain subdued in the next quarters. The banking system continues to be stable, liquid, and well capitalized, but the pandemic has contributed to the buildup of credit risk. The current account deficit widened in 2020, while gross international reserves stood at 6 months of prospective imports.

“Program performance has been strong, with all end-December 2020 quantitative targets met and all except one reform targets observed. However, looking ahead, risks to the fiscal and debt outlook have heightened. The fiscal deficit in the current and next two budget years is projected to widen further owing to the need for increased spending to, inter alia, accommodate the COVID-19 vaccine rollout, hire new teachers to minimize scarring from human capital loss, and provide support to the private sector and state-owned enterprises. As a result, public and publicly-guaranteed debt is projected to increase to just over 80 percent of GDP by 2022, from 71.3 percent at end-2020. While Rwanda’s risk of debt distress is expected to remain moderate, risks have heightened and buffers to cushion the impact of external shocks have diminished.

“Given the deteriorated fiscal and debt outlook, the uncertainty about the pace of the recovery, and Rwanda’s history of frequent macroeconomic shocks, it is crucial to strike a balance between sustaining the economic recovery and maintaining fiscal responsibility. Policy action to support the recovery should be complemented with a growth-friendly fiscal consolidation once the crisis abates, buttressed by credible revenue and spending measures to bring debt to the anchor of 65 percent of GDP within a reasonable timeframe. To allow sufficient time to identify such measures, the authorities have requested a one-year extension of the PCI program. Additionally, financial sector vulnerabilities should be contained, aided by intensified monitoring of credit risk and prudent loan classification and provisioning.

“Maintaining the momentum towards achieving an inclusive recovery and the Sustainable Development Goals will also benefit from accelerating efforts to mitigate emerging risks and advance key reforms under the PCI program. These include measures to bolster domestic revenue mobilization under Rwanda’s Medium-Term Revenue Strategy, rationalize spending, ensure the quality of public investment, and strengthen the management of fiscal risks, including from state-owned enterprises, public-private partnerships, and government loan guarantees. Measures to deepen financial markets, sustain the expansion of digital payments, and further financial inclusion should help fast-track private sector development and foster strong and inclusive growth in the medium term.

“The mission is grateful for the authorities’ close cooperation.”