Kigali, November 2, 1999

Mr. Camdessus:

1.  The attached memorandum of economic and financial policies (MEFP) of the Government of Rwanda describes the progress made in implementing the 1998/99 (April–March) program supported by the first annual arrangement under the Enhanced Structural Adjustment Facility (ESAF), which was approved by the Executive Board of the Fund on June 24, 1998. The MEFP sets out the objectives and policies which the Government intends to pursue under the 1999/2000 (July–June) program for the second annual arrangement under the ESAF and for the medium term. This program was formulated in conformity with the Government's updated policy framework paper (PFP) for 1999/2000–2001/02, which was prepared in collaboration with the staffs of the International Monetary Fund and the World Bank and which is being transmitted to the IMF and the World Bank. The Government will make the PFP and the MEFP available to the public.

2.  In support of these objectives and policies, the Government of Rwanda hereby requests the second annual arrangement under the ESAF, in an amount equivalent to SDR 23.80 million (29.7 percent of quota). The Government will also request support from the World Bank, the AfDB, the EU, and other multilateral and bilateral creditors.

3.  The Government of Rwanda will continue to provide the Fund with such information as the Fund requires to assess Rwanda's progress in implementing the policies described in this letter and attached memorandum, as well as the policy framework paper mentioned in paragraph 1. Moreover, Rwanda will continue to consult with the Fund on its economic and financial policies, in accordance with the Fund's policies on such consultations.

4.  The Government of Rwanda believes that the policies set out in the attached memorandum are adequate to achieve the objectives of the program, but it will take any further measures that may become appropriate for this purpose. During the period of the second annual arrangement, the Government of Rwanda will consult with the Managing Director of the International Monetary Fund on the adoption of any measures that may be appropriate, at the initiative of Rwanda or whenever the Managing Director requests such a consultation. Moreover, after the period of the second annual arrangement and while Rwanda has outstanding financial obligations arising from loans under that arrangement, the Government will consult with the International Monetary Fund from time to time, at the initiative of the Government or whenever the Managing Director requests consultation on Rwanda's economic and financial policies.

Sincerely yours,

Attachment: Memorandum of Economic and Financial Policies

1.  The macroeconomic objectives under the 1998/99 (April–March) program were broadly achieved. The outcomes for real GDP growth in 1998 (9.5 percent) and inflation (as measured by the average urban consumer price index (CPI) (6.8 percent) were better than foreseen under the program, reflecting the strong recovery of agricultural output, which, in turn, was helped by the improved security situation in the northwest and the resettlement of returned refugees.

2.  The midterm review of the first annual ESAF arrangement was originally expected to be based on performance through end-September 1998. However, the quantitative performance criteria on net foreign assets of the National Bank of Rwanda (BNR) and the net repayment of domestic arrears were missed mainly reflecting delays in donor disbursements (in part related to the conflict in the Democratic Republic of the Congo (DRC)) and problems in monitoring government expenditure; there were also significant emerging revenue short-falls. In light of these slippages, the authorities took prompt remedial actions during the last quarter of 1998 (in particular to strengthen revenue collection) to safeguard the targets of the financial program for end-December 1998, as well as to expedite the implementation of structural measures that were behind schedule. As a result, the financial and structural program targets for December 1998 were broadly met, and the midterm review was completed on March 24, 1999.

3.  While the primary fiscal accounts for 1998 were almost in balance (within the program target equivalent to –0.2 percent of GDP), there was a shift in the composition of spending with military spending exceeding the budget allocation by about ½ percent of GDP (reflecting in part the reintegration into the national army of returned soldiers of the prewar government) and underspending on the social sectors (related to delays in regularizing and hiring new teachers). In the context of the midterm review of the first annual ESAF arrange-ment, as well as the 1999 budget, the Government has reiterated its commitment to containing defense expenditure and significantly increasing social spending, while improving the monitoring of social sector developments through quarterly spending targets (effective since early 1999) and regular social performance indicators.

4.  In the first half of 1999, despite good agricultural performance, real GDP growth slowed down, reflecting problems in the transport and manufacturing sectors (including beer/lemonade production), and is projected at 5 percent for the year. Inflation was almost zero in the first half of 1999 as the fall in food prices that occurred during most of 1998 slowed down. Inflation is expected to remain low, with the 12-month CPI projected to be below 3 percent at end-1999. In the first eight months of 1999, the exchange rate of the Rwanda franc depreciated by about 2 percent against the U.S. dollar; it appreciated by about 8½ percent and 7½ percent in nominal and real effective terms, respectively, as the dollar appreciated vis-à-vis the currencies of Rwanda's main trading partners, while Rwanda's inflation was close to that of its trading partners. The parallel market premium rose substantially from about 5 percent early in the year to about 10 percent in recent months. Official reserves have remained close to their 1998 level, equivalent to over six months of imports c.i.f.

5.  In the first half of 1999, the authorities broadly implemented fiscal policies under the 1999 budget, as agreed under the ESAF-supported program. However, the primary fiscal deficit exceeded the indicative target for June by 0.7 percent of GDP, mainly as a result of revenue shortfalls. These shortfalls were due to several factors, partly outside control of the Government: higher-than-expected revenue losses, owing to a significant tariff reduction in January in line with the Cross-Border Initiative (CBI) objectives; transport problems on the Kenya route, owing to the enforcement by the Kenyan government of maximum axle weights since late 1998; the drop in transit trade of goods to neighboring countries in the Great Lakes area; a drop in sales of beer and soft drinks; problems in customs administration; and delays in the collection of tax arrears and the tax assessment of small and medium enterprises.

6.  The Government kept primary expenditure (including on defense) within the targets for June 1999, and met most social spending objectives except for some underspending in health, related to delays in recruiting new qualified staff. However, a temporary overrun (of about 0.2 percent of GDP) on defense expenditure is expected for the third quarter related to the purchase of equipment; this will be offset by a correspondingly lower expenditure in the last quarter. Exceptional social spending programs were largely implemented as foreseen, with the transfer as budgeted to the fund for genocide survivors and the demobilization payments to the 3,600 soldiers demobilized at end-1998. With recent improvements in expenditure monitoring, domestic arrears were repaid as planned and the float of new arrears on goods and services and transfers was kept within the "normal" level of RF 2 billion. In addition, expenditure commitments and payment orders continued to be closely monitored to avoid abnormal delays in the signing of payment orders.

7.  At end-June 1999, foreign-financed capital spending (which accounts for almost all public investment projects) was less than one-quarter of the budget allocation for the year, because of delays in project preparation and weak implementation capacity within the line ministries, exacerbated by arduous procedural requirements of donors. Reflecting larger-than-expected disbursements of external budgetary support in the second quarter of 1999, the Government was able to build up deposits with the BNR. However, after adjusting for the excess budgetary support above the projected amounts, the indicative program ceiling for net credit to government at end-June was missed by about RF 2 billion, as the higher primary deficit was financed by the use of external budgetary support.

8.  After sluggish growth in 1998, money demand remained subdued in 1999, with broad money growth at about 2 percent in the 12-month period ended-June 1999 reflecting faster growth in the nonmonetized sectors of the economy, particularly agriculture. Despite the significant disbursements of external budgetary support, net foreign assets of the BNR remained flat in the first half of 1999, and the target for end-June was missed. In light of the lower-than-targeted reserve money growth through net foreign assets, banks' liquidity demand was in part met by modest liquidity injections by the BNR. Banks' net foreign assets deteriorated sharply in the first half of 1999, reflecting withdrawals from resident foreign exchange accounts, banks' sales to the foreign exchange bureaus in response to higher demand, reflected in premia on the foreign exchange markets (perhaps related to unrecorded trade and net private capital outflows), and banks' deposits of foreign exchange with the BNR. Growth of credit to the private sector remained close to 20 percent in the 12-month period through June 1999. During the first half of 1999, deposit and lending interest rates fell slightly, but real interest rates remained positive.

9.  In 1998, the external current account deficit (excluding official transfers) is estimated to have remained close to the 1997 level of 17 percent of GDP, as lower imports of goods and services and higher-than-expected volume of tea exports more than offset lower coffee export volumes and prices. Imports are estimated to have dropped by about 8 percent in dollar terms in the first half of 1999, reflecting in part increased transport costs on the Kenya route. However, unrecorded imports seem to have increased. Official reserves were less than envisaged at mid-1999, reflecting substantial sales by the BNR to commercial banks. In recent months, Rwanda signed bilateral rescheduling agreements with all its Paris Club creditors. It is seeking agreements with its non-Paris Club creditors on terms at least comparable to those granted by Paris Club creditors. Furthermore, it has regularized its arrears situation vis-à-vis the Arab Bank for Economic Development in Africa (BADEA) and the OPEC Fund, and will do so vis-à-vis the European Union before the end of the year.

10.  The structural reforms envisaged for 1998 were broadly implemented, although some with delays, in particular in the areas of fiscal and civil service reform. The authorities took several steps to render the RRA operational and to improve tax administration; these included increased preshipment inspection (PSI), monitoring of transit trade, and the use of insurance bonds for both transit trade and imports en route to domestic customs depots. Expenditure management was improved through a close monitoring of expenditure commitments, payment orders, and payments; the completed computerization of the payroll, including for all teachers; the initiation of the computerization of budget/treasury operations; and the wide circulation of budget execution guidelines. With respect to civil service reform, in the course of 1998 about 3,600 ghost workers were removed from the payroll; almost 3,000 unqualified civil servants were retrenched; a civil service census was carried out at year-end; progress was made in reconciling payroll and census data during the following months; and a new salary structure (including the monetization of all fringe benefits) was introduced in January 1999, significantly improving incentives for civil servants. Furthermore, new organizational structures for all ministries and a new job classification/grading system were prepared.

11.  The Government proceeded with public enterprise reform. Since June 1998, it completed the sale of 20 enterprises, offered for sale 14 more enterprises, and initiated the liquidation of 3 enterprises. In the financial sector area, the new banking law was adopted by parliament at end-March 1999 and promulgated in late August; the financial audits of the five commercial banks were completed in May 1999. At end-1998, the authorities commenced treasury-bill auctions with a view to further enhancing indirect monetary policy instruments. The exchange regime was further liberalized, prior to the authorities' acceptance of the obligations under Article VIII in December 1998. In this context, the BNR recently issued and widely publicized the new consolidated exchange regulations, and the modalities of their implementation, including the new rules for the operation of foreign currency accounts.

12.  In response to the above-mentioned delays in structural reforms, the Government is committed to implement, before end-October 1999, the measures listed as prior actions in Box 1.

13.  The Government's strategy for high growth, which is essential for bringing down Rwanda's high incidence of poverty (estimated at 70 percent) is centered on (a) maintaining a stable macroeconomic environment conducive to private savings and investment; (b) improving government revenue mobilization and expenditure management and prioritization, with particular emphasis on good governance and human resource development; (c) accelerating structural reforms in the areas of civil service, financial sector, and public enterprises; and (d) establishing and maintaining an institutional framework conducive to private sector activity and external competitiveness. With a view to strengthening the link between economic/social policies and poverty reduction, the Government intends to develop a Poverty Reduction Strategy Paper, for completion in the course of 2000.

14.  The Government remains committed to reducing the fiscal deficit (excluding grants) and achieving a sustainable debt position over the medium term. In light of Rwanda's social and rehabilitation needs, the current macroeconomic environment with very low inflation, and the prospects for very concessional donor support for the social sector through the budget, the Government envisages significant increases in social spending over the next years. The Government is aware that this strategy requires close collaboration with donors to ensure their sustained support, a transparent budget process incorporating the results of the recent social sector expenditure review, and close monitoring of the quality and impact of this spending. The Government is also aware of the need to redouble the efforts to mobilize domestic revenue to ensure the sustainability of social and other priority expenditure over the medium term.

15.  Consistent with this strategy, Rwanda's economic policies are aimed at achieving the following macroeconomic objectives for 1999/2000–2001/2002: (i) to attain on average an annual real GDP growth of almost 6 percent; (ii) to maintain the average inflation rate at below 3 percent a year; (iii) to contain the external current account deficit (excluding official transfers) at about 17 percent of GDP; and (iv) to maintain gross official reserves at a minimum of four months of imports c.i.f. during the period. Achieving these objectives, while laying the basis for sustainable fiscal and government debt positions, would require an improvement in government revenue by about ²/3 of 1 percentage point of GDP a year, containment of the primary fiscal deficit at an average of about 1 percent of GDP, and an increase in investment to almost 20 percent of GDP in 2001–02 (from 15.7 percent in 1998).

16.  Fiscal policies in 1999/2000, straddling the 1999 and 2000 budgets, will be broadly consistent with the program supported by the three-year ESAF arrangement. However, in view of adverse exogenous factors affecting revenue performance in 1999, as well as delays in tax administration reforms taking effect, the Government's revenue targets have been revised downward. The key objectives are to (i) increase revenue from 10.5 percent of GDP in 1999 (10.2 percent, excluding proceeds from import surcharges) to 10.7 percent of GDP in 2000, while maintaining trade taxes consistent with the CBI objectives; (ii) contain the wage bill at about 5 percent of GDP, while achieving a further improvement in the civil service pay and incentive structure; (iii) reduce defense expenditure from 4.0 percent of GDP in 1999 to 3.7 percent of GDP in 2000 (and from 3.5 percent of GDP to 3.2 percent of GDP excluding the national police); and (iv) increase social spending from 3.7 percent of GDP in 1999 to about 4 percent of GDP in 2000. Consistent with these targets and the expected financing of the budget, the primary fiscal deficit is targeted at 0.7 percent of GDP in 1999 and near balance in 2000 (compared with near balance and a surplus of 1 percent under the original program, respectively).

17.   1999 budget. In light of the revenue shortfalls in the first half of 1999, the Government has taken several measures under the midyear budget revision to contain the revenue shortfall and the primary deficit:

• the imposition of 10–15 percent temporary import surcharges on imports subject to the maximum and intermediate rates (of 25 percent and 15 percent, respectively) (estimated revenue gain equivalent to 0.3 percent of GDP in 1999);

• after a 4 percent price increase in January 1999, a further increase in retail petroleum prices by 8 percent effective September, together with the adoption of a flexible pricing mechanism under which retail prices are adjusted monthly to reflect developments on the world market.

• reductions in the range of 10–15 percent in the budget allocations for nonsocial expenditure on goods and services (including on defense) to partly offset the needs of two additional ministries created in February 1999; and

• immediate steps to improve tax and customs administration, in particular, the strengthening of preshipment inspections, the enhanced collection of tax arrears and debt service from identified public enterprises, the presumptive income tax from small and medium enterprises, and nontax revenue, based on the results of the recently undertaken measures (partly as prior actions, see Box 1).

Also as a prior action, the RRA has, by mid-September 1999, adopted a prioritized action plan and timetable for the period October 1999/end-2000 to strengthen tax and customs administration. The plan will focus on the following elements:

(i)  Strengthening of preshipment inspection: to 80 percent for non-petroleum imports equivalent to US$5,000 and higher, and to 100 percent for petroleum imports. For non-petroleum imports equivalent to US$5,000 and above without preshipment inspection, post arrival inspection (covering both bank and nonbank transactions) will be carried out. For all other imports below US$5,000, periodically updated reference prices from SGS and internationally accepted valuation codes will be applied.

(ii)  Strengthening of the control of transit trade, including by full application of insurance bonds to all transit imports and the strengthening of the system of warehousing of goods.

(iii)  Acceleration of computerization of the tax department to monitor assessment and collection; and strengthening the use of the customs documentation system, ASYCUDA.

(iv)  Strengthening of enforcement of the penalty system and of the Revenue Protection Service.

(v)  Strengthening of staff training in tariff classification, PSI/valuation, tax assessment, accounting, and auditing.

18.  Furthermore, the Government is stepping up the preparation of the value-added tax, based on the VAT implementation plan adopted in June 1999, including the submission to parliament of the draft VAT law (by end-1999) and the ongoing campaign to educate the public on the VAT.

19.  With the measures undertaken to improve revenue collection and the Government's commitment to restrain nonsocial expenditure for the rest of 1999, the agreed primary fiscal deficit target of 0.7 percent of GDP for 1999 is expected to be attained. To ensure meeting these targets for 1999, the authorities have fixed monthly revenue and expenditure targets for the remainder of the year; meeting these targets through end-September 1999 would be a prior action.

20.  The Government remains committed to safeguarding expenditure on health and education. In this regard, it completed by end-October the regularization of all teachers and other civil servants. It will also further improve the monitoring of social spending and its impact through regular monitoring of performance indicators (Tables 3–5). Exceptional social spending programs—related to assistance to genocide survivors, demobilization and reintegration of ex-soldiers into society, retrenchment of civil servants, and the establishment of governance institutions¹—are expected to be implemented as programmed (equivalent to 1.3 percent of GDP).

21.  Capital expenditure is expected to increase to 7.6 percent of GDP in 1999 (compared with 6.7 percent of GDP in 1998 and 9.5 percent under the program) as a result of the Government's efforts to improve the implementation and monitoring capacity for investment projects. In this regard, the establishment at end-1998 of the Central Project Bureau (CEPEX) (which coordinates project selection, external financing, and project monitoring), and a strengthening of the procedures of the Central Tender Board with assistance from the World Bank, AfDB, and UNDP have proved useful.

22.  Regarding expenditure management, the Government is implementing several mechanisms to improve the transparency of the budget process, expenditure control, and government accountability (Box 2). Furthermore, with technical assistance from UK-DFID and the Fund, the Government is in the process of introducing a medium-term expenditure framework, which aims at progressively introducing program-based budgeting, linking expenditures to monitorable outputs in each ministry.

23.  Regarding domestic financing, the program for 1999 foresees a net repayment of RF 3.5 billion, including all arrears outstanding at end-1998 (RF 1.5 billion), arrears to the CSR and post office (RF 0.8 billion), arrears on account of World Bank and IFAD projects (RF 0.7 billion), wage arrears owed in respect of regularizing the status of civil servants (RF 0.6 billion), and newly identified arrears (in part incurred by the prewar government, RF 2.1 billion). This net repayment takes into account the normal "float" of not-yet-paid payment orders, which the Government is committed to keep within RF 2 billion. The Government will also start repaying the Caisse sociale du Rwanda, based on a restructuring plan for the CSR and the consolidation of government debt to the CSR, scheduled for adoption by December 1999.

24.   2000 budget. The authorities aim at increasing revenue to 10.7 percent of GDP in 2000, while maintaining an open trade regime consistent with the CBI objectives. In this regard, the temporary import surcharges will be reduced by 50 percent with the 2000 budget, with full elimination in the course of 2000. The improvement in revenue collection (by ½ percent of GDP, when the revenue loss from the elimination of surcharges is taken into account) will be achieved through a broadening of the tax base (including through the introduction of a VAT from mid-2000), a reduction in tax exemptions, and the implementation of the RRA action plan).

25.  The authorities are committed to reducing defense spending to below the equivalent of 3.2 percent of GDP, taking into account the envisaged demobilization of 11,400 soldiers during 1999–2000. The Government intends to maintain the budget allocations for the national police at 0.5 percent of GDP and that for other nonsocial primary spending at 3.2 percent of GDP, both equivalent to their expected 1999 levels.

26.  The authorities intend to contain the Government's wage bill to the equivalent of 4.8 percent of GDP and 45 percent of revenue (from 5.0 and 48 percent, respectively, in 1999), while further improving the salary and incentive structure. This will be achieved through a reduction in the size of the military; a further retrenchment of unqualified civil servants; and a streamlining of the core civil service (excluding teachers), in line with the newly adopted organizational structures of ministries, to not more than 9,500 in 2000 (from an average of about 9,700 in recent months), while safeguarding the needs of the health and justice sectors. The recruitment of new teachers—above the current number of almost 28,000 after regularization of teachers not yet on the payroll and removal of ghosts—will be subject to approval by the ministers of Finance and Civil Service and will be based on availability of qualified teachers and teaching infrastructure.

27.  Recurrent social expenditure (including for the health and education ministries), as agreed upon with World Bank and Fund staffs will be increased to about 4 percent of GDP (from 3.7 percent targeted for 1999; Table 3). In the context of the 2000 budget, the Government will identify social and poverty reduction priority spending programs. The quarterly spending targets for these programs will be agreed upon with the staffs of the World Bank and the Fund at the time of the first review of the second-year ESAF arrangement. In case revenue collection exceeds the program target, the additional resources will be allocated to the agreed social and other priority sectors.

28.  The Government is preparing social spending programs, based on the social sector expenditure reviews and in consultation with, and technical assistance from, donors. Emphasis will be placed on: (i) adequate provision of teaching and health care supplies, including books and medicine; (ii) improving salaries and on-the-job training of teachers and health workers; and (iii) increasing the number of qualified health workers. After a significant increase in spending on tertiary education in 1999 with a view to meeting the urgent rehabilitation needs of several institutions (including for teacher and nurse training), the share of tertiary education in total education spending will decline to below one-third in 2000 and the balance will shift to primary and secondary education. In this context, the authorities will implement efficiency-enhancing measures in tertiary education, including a system of student loans (to be effective from the 2000/01 academic year).

29.  The Government will further improve the monitoring of social spending through recipient and beneficiary surveys, the regular reporting on intermediate output and outcome indicators (Tables 3–5), and an increase in the implementation capacity of the social minis-tries (with technical and financial assistance from DFID, World Bank, and other donors).

30.  Exceptional social spending in 2000 is projected at the equivalent of 1.8 percent of GDP; in addition to assistance to genocide survivors, emphasis will be placed on the reintegration of demobilized soldiers into civil life, training and severance payments for retrenched civil servants and public enterprise employees, and provision of food to prisoners. The composition of exceptional social expenditure is monitored according to detailed understandings with Fund staff. In light of their special nature related to the aftermath of the genocide, these expenditures would remain outside the primary fiscal balance targeted under the program; if Rwanda receives external budgetary support in excess of the programmed amounts, the excess can be used either to increase exceptional social spending or to increase the budget allocations for the social sector, in consultation with Fund and World Bank staffs.

31.  Regarding domestic financing, the Government intends to repay the depositors of the Caisse d'épargne (under liquidation) in an amount of RF 1 billion.

32.  Monetary and exchange rate policies will continue to aim at keeping annual inflation at or below 3 percent and meeting the BNR's net foreign assets target. Inflation, which has been very low during the past one and a half year, is expected to pick up somewhat as the increase in food supplies that has caused food prices to drop is leveling off. The increase in the GDP deflator in 1999 is projected at 2 percent. The monetary program remains based on a reserve money target, which will be pursued primarily through the BNR's money market interventions. In order to assist the commercial banks in the efficient management of their liquidity, the BNR will, in addition to providing banks with statistics on money and banking in Rwanda, publicize their intentions regarding monetary policy (e.g., through public statements, press releases, and letters to banks). In particular, they will clarify their policy that the exchange rate will be market determined, and that liquidity policy will be determined by the targets for reserve money.

33.  Taking into account the lower projected growth in real GDP and money demand, both reserve money and broad money are now projected to grow at 5 percent in 1999, and about 6 percent and 8 percent, respectively, in 2000. To influence banks' liquidity, the BNR will continue to use both money market and treasury bill auctions. It will further enhance the transparency of these operations for the participating banks, including by providing advance notification and indicating the volume of the intended sales or purchases. They will also increase the frequency of auctions and the variety of maturities. With a view to enhancing banks' liquidity, the authorities will initiate the conversion of consolidated government debt to commercial banks into treasury bills in the fourth quarter of 1999; thereafter, the process of gradual conversion of this debt into treasury bills is expected to be completed by end-2000. To enhance the development of a secondary market, the BNR will issue an instruction requiring banks to hold a minimum proportion of their assets in liquid form. The transfer of eligible government bank accounts from commercial banks to the BNR will be completed in the course of 2000.

34.  Exchange rate policy will continue to be guided by the principle of allowing the exchange rate to respond to market conditions, with intervention by the BNR aimed only at meeting the net foreign assets target and at smoothing excessive short-term exchange rate fluctuations (such as those related to commodity price fluctuations and the disbursement pattern of donor support) without resisting underlying trends. The competitiveness of the tradables sector will be assessed on an ongoing basis by monitoring the real exchange rate, relative prices, profitability and productivity growth, and other relevant indicators. The net foreign assets target takes into account a gradual decline in the import coverage of official reserves from its current level of about six months of imports c.i.f. to a minimum level of four months. In view of recent developments on the exchange market, the authorities are committed to more actively pursue the BNR's net foreign assets target and facilitate a reduction in the parallel market premium.

35.  The exchange regime. After recent steps to widely publicize the revised regulations, the authorities are further enhancing the functioning of the foreign exchange market by strengthening the supervision of banks' and foreign exchange bureaus foreign exchange operations consistent with existing regulations; by informing economic agents about the advantage of bank settlements instead of cash transactions. The operation of the forward market, which was established in May 1999, will also be encouraged but without any involvement of the BNR. The BNR is committed to strictly enforcing the limits on banks' and foreign exchange bureaus' net open foreign positions. Furthermore, the BNR will refrain from swap and similar arrangements to buy/sell foreign exchange from banks for the purpose of meeting its net foreign assets target.

36.  Financial sector reform. At end-September 1999, the BNR reached agreement with the five commercial banks on the amounts of additional provisioning and capital required, based on the recently completed audits. By end-December 1999, it will agree with the banks on revised restructuring plans, as well as on a timetable for each bank for added provisioning, the recognition of impaired assets, and the increase in capital. In this regard, all banks are expected to meet the minimum provisioning standards and reach a capital adequacy ratio of 5 percent by end-2000 (and the Basle capital adequacy standard of 8 percent by mid-2002). Most new capital will be provided by the private sector (including foreign bank shareholders) and not by the Government, which has decided that it will become a minority shareholder in the two largest banks (BK and BCR) in which public interests presently represent one-half or more. The BNR is further strengthening its capacity for banking supervision to ensure compliance with the recently issued regulations under the new banking law. It will increase the coverage and frequency of on-site inspections of each bank through a comprehensive inspection every 12 months and a full external audit of each bank at least once every two years from early 2000 onward. These inspections/audits will include monitoring bank loan approval arrangements in line with sound banking practices. Banks will be expected to put in place internal audit departments that report to their boards.

37.  The Government, meanwhile, is taking several steps to help improve the recovery of nonperforming loans by expediting the production of documentation necessary for foreclosure; accelerating seizure procedures; and establishing commercial courts. Furthermore, the arbitration center, established by the private sector last May, will help the loan recovery process even though it lacks legally binding authority. With regard to other financial institutions, the Government is expecting to shortly appoint a liquidator for the state-owned Caisse d'épargne. With the new banking law, the UBP has been brought under the supervision of the BNR and the relevant regulation for cooperative savings and loans institutions will be issued by early 2000. A financial audit of the UBP will be commenced by March 2000, and based on its recommendations an organizational and financial restructuring plan will be put in place in the course of 2000.

38.  The restructuring plan for the Caisse sociale du Rwanda (CSR), based on the recently completed financial, legal, and organizational audits and actuarial study, will be finalized and adopted by end-December 1999. The plan calls for determining the amount of the Government's nonperforming debt to the CSR, which is to be consolidated. The consolidation of this debt will be initiated in January 2000, through the use of external budgetary support. The Government will submit to parliament, by March 2000, a draft organic social security law which sets out the regulatory framework for a two-tier benefit system: one with obligatory enrollment for all government and private sector workers subject to the labor code and provided by the public sector; and a complementary one with voluntary participation which could be provided by both public and private agencies.

39.  The authorities remain committed to the CBI objectives. They will progressively phase out the temporary import surcharge (to be eliminated in the course of 2000), and are aiming at implementing zero intraregional tariffs consistent with progress made by other countries in the region. Furthermore, the Government intends to review the existing 4 percent Magerwa tax (of which 1 percentage point accrues to the publicly owned warehouse company) with a view to replacing it by a statistical tax to reflect the cost of warehouse services and consistent with WTO rules in 2001. The authorities will also pursue the other CBI objectives regarding the promotion of investment and cross-border trade and factor flows. In this regard, the technical working group will be established by December 1999 and the Letter of the CBI Policy will be completed by March 2000.

40.  Regarding external financing, residual financing gaps—after projected official transfers and project loans, obtained debt relief and refinancing from Paris Club creditors and multilateral creditors, and debt relief from non-Paris Club creditors to be finalized over the coming months—are projected at about US$100 million in both 1999 and 2000. These gaps are expected to be fully covered by budgetary support from the World Bank, AfDB, EU, and bilateral donors. The Government will continue to pursue its prudent external debt management strategy (including through close coordination between the Ministry of Finance and the BNR) and refrain from contracting external debt on nonconcessional terms.

41.  Rwanda's external debt situation is likely to remain very difficult in the medium term. The updated debt sustainability analysis, prepared in consultation with Fund and World Bank staffs, indicates that even under optimistic export growth projections, Rwanda's net present value (NPV) of debt-to-exports ratio and debt service-to-exports ratio, after application of traditional debt relief mechanisms, will remain in the order of 500 percent and 30 percent, respectively, during the 1999-2001 period. The Government will, therefore, seek qualification for assistance under the enhanced HIPC Initiative, based on its track record under ESAF- and earlier Fund-supported programs.

42.  In addition to structural reforms in the fiscal, financial, and external trade areas, the Government attaches high priority to the reform of the civil service, the demobilization and reintegration of soldiers, the privatization of public enterprises, and private sector development (Box 3).

43.  The authorities remain committed to vigorously pursue the ongoing reform of the civil service with a view to establishing an efficient, well-paid and qualified public administration, which promotes good governance, i.e., transparency, accountability, and integrity. In the remainder of 1999, the authorities will—with technical assistance from UNDP and World Bank—implement the new organizational structures of all ministries (including for the decentralized departments in the préfectures and public agencies), complete the job descriptions, and convert all staff into positions/grades. With these new structures and the recent removal of ghost workers identified in the civil service census, it is envisaged that the size of the core civil service will be contained within 9,500 during 2000, and that the number of teachers (estimated at almost 28,000 at end-September 1999 after regularization) will not exceed 28,500 in the 1999/2000 school year.

44.  Regarding civil service salaries, after the adoption of a new more differentiated pay structure in early 1999, the authorities intend to revisit the salary structure with the 2000 budget to ensure consistency with the new organizational structures. To promote efficiency, accountability, and transparency, the Government intends to further strengthen the recently established National Tender Board and Office of the Auditor General. Furthermore, it is revising the civil service statutes/Code of Conduct and preparing a "leadership code," including, financial disclosure rules, for both senior public and elected officials.

45.  The Government will accelerate the implementation of the privatization program. By mid-2000, the Government will sell, liquidate, bring to the point of sale, or sell its shares in a cumulative total of 46 out of the 69 public enterprises included in the divestiture program (based on the attached timetable, Table 2), with priority to the privatization of the 9 tea factories and the liquidation of Caisse d'épargne du Rwanda in the course of 2000. Regarding the public telecommunications company (Rwandatel), the Government will submit to parliament, by December 1999, a regulatory framework to abolish its monopoly and regulate the sector, and it intends to complete the offer for sale by September 2000. Following the abolishment of the monopoly of the electricity and water company (Electrogaz) in September 1999, the Government intends to adopt a policy framework for the restructuring of the company and submit to parliament a regulatory framework for the sector by June 2000, with a view to completing the restructuring/privatization of Electrogaz by July 2001. The authorities will continue to ensure the transparency of the privatization process (including through a wide advertisement of the offer for sale) and accelerate the actual sale (including through the timely preparation of title deeds).

46.  The Government has recently revised the 1997 demobilization program to take into account the recent reintegration of ex-FAR into the army. Following the demobilization of about 8,600 soldiers during 1997–98, the Government intends to demobilize 11,400 soldiers during 1999–2000 and another 5,000 in 2001, thus bringing the total to 25,000 (from 20,000 under the original program). The demobilization program provides for short-term assistance to demobilized soldiers in the form of cash allowances, training, and subsidized small-scale credits, with total costs estimated at about RF 1.9 billion in 1999 and RF 2.4 billion in 2000.

47. Regarding the regulatory framework for the private sector, parliament is expected to adopt, in the next few months, the new labor code which aims at enhancing labor mobility, eliminating gender discrimination and wage controls, and reducing labor costs. The Rwanda Investment Promotion Agency is expected to be fully operational by mid-November 1999.

48.  A critical element of the Government's social policy is reducing the incidence of poverty, estimated at over 70 percent of households. As discussed in the Government's policy framework paper (PFP), the authorities are adopting a range of measures to raise rural incomes through improving the distribution of inputs (with subsidies for target groups), developing microcredit schemes, and implementing targeted poverty alleviation programs at the communal level. A significant improvement in the status and opportunities for women will be pursued through the recently adopted changes in the laws concerning property rights, and educational programs to reinforce these laws.

49.  Budgetary recurrent spending on health and education is projected to increase by just over 40 percent each in 1999, and by almost 35 percent and 15 percent in 2000, respectively. Special emphasis will be put on improving the quality and geographical distribution of teachers and primary health workers, and on improving enrollment, retention, and progression rates in primary and secondary schools, in particular for girls. The Government will further strengthen the monitoring of key poverty and social performance indicators. To this effect, the special observatory within the Ministry of Finance, which will work closely with the social ministries, will be established by December 1999. Plans are under way to undertake specific beneficiary surveys to measure access of the population to basic social services. Furthermore, household living conditions surveys are expected to be completed in 2000.

50.  The Government is committed to addressing weaknesses in the macroeconomic and social database. The BNR is addressing statistical problems in the monetary accounts and improving the reconciliation with the use of bank financing by the budget, in close coordination with the Ministry of Finance. The BNR has also prepared an action plan to improve the collection of balance of payments statistics based on recent recommendations and technical assistance from the Fund. In the fiscal area, the Government will further improve data reporting (including Government Finance Statistics from end-December 1999 onward) with assistance from the Fund in the areas of budget preparation and treasury operations. The authorities have also requested further technical assistance from the Fund in the areas of national accounts and prices.

51.  Progress in economic policy implementation under the program will be monitored through quantitative and structural performance criteria and benchmarks for the period October 1999-September 2000 (Tables 1–2). The quantitative targets for December 1999 and June 2000 will constitute performance criteria and those for March and September 2000 quantitative benchmarks.

52.  The program contains automatic contingency mechanisms to adjust the monetary program targets for shortfalls/excesses in external budgetary support vis-à-vis the program-med amounts. In the case of a shortfall, net bank financing of the budget is allowed to increase (with an annual cap equivalent to about 1¾ percent of GDP), but only to the extent that the shortfall was not offset by a shortfall in exceptional social spending or social spending. In the case of an excess, the additional external budgetary support may be spent on the agreed exceptional social spending or social spending items in consultation with the staffs of the Fund and World Bank and donors (with a downward adjustment in the primary fiscal balance target in case of additional social spending which is fully financed). Any remaining excess budgetary support will be deposited in the Government's accounts with the banking system.

53.  The Government is further strengthening the monitoring of the program, including through the timely reporting of the budget execution by ministry within two weeks after the end of each month; a detailed reporting of government bank accounts; the regular provision of the bank deposits and other financial accounts of public enterprises and autonomous public agencies; and the quarterly provision of data on social spending and performance indicators (Tables 3–5). To enhance program monitoring and coordination, the authorities are extending the Interministerial Committee for the ESAF-supported program (with representation from the ministries of Education and Health) and are strengthening the associated Technical Committee.

54.  The implementation of program policies will be subject to two reviews by the Fund. The first review, to be completed not later than March 2000, will focus on assessing the revenue impact of the tax measures foreseen under the program (including the phasing out of the import surcharges), as well as progress in civil service reform. Completion of the first review, observance of the quantitative performance criteria at end-December 1999 and the structural performance criteria through December 1999, and adoption of a satisfactory budget for 2000 will be conditions for the second loan disbursement under the second annual ESAF arrangement. The second review, to be completed no later than September 2000, will focus on progress in tax reforms (including the VAT) and financial sector reform; completion of the second review and observance of the quantitative performance criteria at end-June 2000 and structural performance criteria through June 2000 will be a condition for the third loan disbursement under the second annual ESAF arrangement.

55.  The Government has taken a number of prior actions, as indicated in Box 1; in addition, meeting the agreed upon government revenue and expenditure targets—consistent with the program targets for the year—through September 1999 will be a prior action.