Kigali, June 4, 1998

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Camdessus:

1. Since the end of the genocide in July 1994, the government of Rwanda has made considerable progress in the rehabilitation of the economy, the resettlement of refugees, and the promotion of national reconciliation. In coping with the aftermath of the events, Rwanda has received financial and technical support from the international community, including from the International Monetary Fund through purchases under the Compensatory and Contingency Financing Facility in November 1995 and the post-conflict emergency assistance policy in April and December 1997. The government has kept a close policy dialogue with the International Monetary Fund leading to the adoption in 1996 of an adjustment program monitored by the International Monetary Fund staff and the elaboration in early 1997 of the government's economic policy framework for 1997-98, prepared in consultation with Fund and World Bank staffs. Rwanda has also benefitted from the technical assistance program, coordinated by the International Monetary Fund, which has helped rebuild the economic management capacity of the Ministry of Finance and Economic Planning and the National Bank of Rwanda, and strengthen the economic and financial statistics.

2. After the broadly successful implementation of its adjustment programs in 1996 and 1997, the government has formulated a Policy Framework Paper (PFP) for the three-year period 1998/99-2000/01, which was prepared in collaboration with the International Monetary Fund and World Bank staffs, and which is being transmitted to the International Monetary Fund and World Bank. The government will make the PFP available to the public.

3. The attached Memorandum of Economic and Financial Policies (MEFP) describes the objectives and policies which the government intends to pursue during 1998/99, the first annual program under an ESAF arrangement, and for the medium term. In support of these objectives and policies, the government of Rwanda hereby requests a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) in an amount equivalent to SDR 71.40 million (120 percent of Rwanda's quota in the Fund), and the first annual arrangement, thereunder, in an amount equivalent to SDR 23.80 million (40 percent of quota). The government will also request support from the World Bank, the African Development Bank, the European Union, and other multilateral and bilateral donors and creditors. It will make the MEFP available to the public.

4. The government of Rwanda will provide the International Monetary Fund with such information as the International Monetary Fund may request in connection with Rwanda's progress in implementing the economic and financial policies and achieving the objectives of the program.

5. 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 first 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 first 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.

Attachment: Memorandum of Economic and Financial Policies

1. Since the end of the genocide in July 1994, the new government has made a considerable effort to cope with the massive economic and social losses associated with the war and the genocide. Progress has been made in resettling old and new refugees and internally displaced persons, assisting victims of genocide, and rehabilitating the administrative capacity and economic, judicial, and social institutions. In its reconstruction effort, the government of Rwanda has worked closely with the international community in the context of roundtable conferences and assistance from the agencies of the United Nations system. The government has maintained a close policy dialogue with the Fund, which has coordinated the technical assistance program to restore the capacity for economic management, and it adopted in 1996 economic reforms under a Fund staff-monitored program. Despite the human and institutional constraints facing Rwanda, the implementation of the 1996 program was broadly satisfactory, and macroeconomic performance was better than targeted, with a strong recovery in output, a rapid decline in inflation, and a marked improvement in the external position. During the 1995-96 period, Rwanda made considerable progress in a number of structural reform areas: the exchange system was liberalized; domestic prices and marketing remained largely free of government intervention; interest rates continued to be market determined, with the National Bank of Rwanda (NBR) relying increasingly on indirect instruments to control money supply; significant steps were made to put the financial system on a sound footing; improvements in tax and customs administration contributed to a strong recovery in revenue collection; and the valuation and privatization of public enterprises were initiated with the adoption by parliament of a legal framework for privatization.

2. The program for 1997, supported by the Fund under its post-conflict emergency assistance policy and by other multilateral creditors, was formulated in the context of the government's economic policy framework for 1997-98. This framework took into account the need for continued economic rehabilitation and capacity building, as well as the reintegration of an estimated 3.8 million old and new refugees (including those returned in the aftermath of the events in the Great Lakes region in late 1996 and early 1997) and internally displaced persons. Implementation of the program was satisfactory: returning refugees and internally displaced persons are being resettled and provided with basic support, and financial policies remained under control despite severe financial and administrative constraints, as well as security problems in the northwestern part of the country.

3. Real GDP growth remained strong (estimated at 11 percent in 1997), with robust growth in all sectors; the 12-month consumer price inflation rate remained below 9 percent in early 1997 but accelerated in the course of the year, owing to food shortages related to the returning refugees and security problems, and reached about 17 percent by end-1997. However, the increase in nonfood prices was limited to 7 percent during 1997 (on an end-of-period basis). The exchange rate of the Rwanda franc, largely market determined, remained stable against the U.S. dollar, and -- reflecting favorable coffee export prices and higher-than-expected aid flows -- official reserves reached about 5 1/2 months of imports c.i.f. at end-1997, well above the program target of 4 1/2 months of imports.

4. Fiscal and monetary policies were broadly in line with program targets and all quantitative benchmarks for the second half of 1997 were met, except for those on the wage bill, the size of the core civil service (reflecting partly ineffective control of recruitment and partly urgent staffing needs in the health and justice ministries), and the reduction of domestic arrears. The primary fiscal account for the year is estimated to have been close to balance, well below the programmed deficit of 0.9 percent of GDP, largely because of higher-than-programmed revenues (estimated at RF 58 billion, compared with a program target of RF 50 billion). The favorable revenue outcome was to a large extent the result of the authorities' efforts to overhaul the customs and internal revenue services, which led to improved income tax collection, including tax arrears. Furthermore, the increase in excise taxes on soft and alcoholic drinks, cigarettes, and petroleum (implemented in the second half of 1997) and the unanticipated coffee export tax proceeds contributed to the good revenue performance. However, part of the income tax collection was based on the previous company and personal income tax rates, which were reduced (retroactively to January 1997) with the new Income Tax Law of mid-1997. These tax payments (equivalent to about 0.3 percent of GDP) will be reimbursed in 1998.¹

5. On the expenditure side, current outlays amounted to RF 64 billion (11.4 percent of GDP), compared with a program target of RF 61.5 billion. In addition to a small overrun on the wage bill (by RF 1.7 billion) related to a slippage on the size of the civil service, expenditure on goods and services was some RF 2 billion higher than programmed as a result of security-related outlays in the last quarter of 1997 and continued difficulties in controlling expenditure on government vehicles and the rehabilitation of government buildings and houses; however, some progress was made in controlling spending on travel abroad.

6. Capital spending, almost entirely foreign financed, is estimated at 9 percent of GDP in 1997, about RF 20 billion (4 percent of GDP) lower than envisaged, reflecting the authorities' preoccupation with the returning refugees, as well as insufficient administrative capacity in the line ministries and associated delays in project aid disbursements. Owing to shortfalls in external budgetary support and the government's limited use of bank financing, further external arrears (in an amount of almost US$20 million) were accumulated, and the reduction in domestic arrears was about half the programmed amount (of RF 8 billion).

7. Broad money grew by about 28 percent, well above the program target of 21 percent and close to the growth of nominal GDP. Private sector credit growth in 1997 is estimated at about 55 percent, reflecting the recovery in all sectors of the economy (with some shift toward medium- and long-term credit) and the availability of banks' excess reserves. However, part of the credit growth (about 14 percentage points) was due to temporary delays in the repayment of trade credits related to coffee exports. The expansion of private sector credit was to some extent offset by an increase in provisioning by commercial banks. Government use of bank credit remained subdued in 1997. Interest rates continued to be market determined and remained stable, with the average rate on 12-month savings deposits staying close to 10 1/2 percent. In order to reduce costs of financial intermediation for banks, the NBR lowered in September 1997 the relatively high reserve requirement from 14 percent to 12 percent while mopping up banks' excess liquidity created by the reduction in the reserve requirement through borrowing on the money market.

8. On the external side, the external current account deficit (excluding official transfers) decreased to 17 1/2 percent of GDP in 1997 (from 18 1/2 percent in 1996) largely owing to the net impact of favorable export proceeds (boosted by high world coffee prices) and an increase in refugee-related imports. These developments, combined with strong net official inflows (including refugee assistance) and a decline in private capital outflows, caused Rwanda's overall balance of payments to turn into a small surplus (from a virtual balance in 1996). Reflecting new external borrowing (mainly from the World Bank and the African Development Bank (AfDB)) and the further accumulation of external arrears to bilateral and certain multilateral creditors, Rwanda's external debt rose to US$1.2 billion at end-1997 (equivalent to 63 percent of GDP), and the debt-service burden (in terms of exports of goods and nonfactor services) declined to about 32 percent (from some 44 percent in 1996).

9. Progress continued in structural reforms. Measures in the fiscal area included the adoption by mid-1997 of the new Income Tax Law (reducing the maximum personal and company income tax rates, introducing accelerated depreciation allowances, and bringing public enterprises into the income tax net) and ad valorem excise tax rates; the preparation of the tariff reduction for 1998; the establishment of the Rwanda Revenue Authority (RRA); the presentation to parliament of a national budget (for the first time since the end of the war); and the strengthening of expenditure management through the application of monthly expenditure limits. In the financial sector, key measures included the adoption in mid-1997 of a central bank law that deepens the NBR's independence in conducting monetary policy; the rescheduling of the government's nonperforming debt to commercial banks; and the provisioning by, and recapitalization of, the two largest commercial banks (Banque Commerciale du Rwanda (BCR) and Banque de Kigali (BK)). On public enterprise reform, the government proceeded during 1997 with the privatization of three enterprises, the offering for sale of eight smaller enterprises, and the initiation of the restructuring of the utility company (Electrogaz) with World Bank support. In the area of the civil service and the military, the government undertook a survey of current and returned former civil servants, and proceeded with the first stage of demobilization and reintegration of soldiers (about 5,000 by September 1997). The government also undertook, with assistance from the International Labor Organization (ILO), a financial audit of the Caisse sociale du Rwanda (CSR) with a view to restructuring the CSR and consolidating the government's debt to it.

10. Economic performance during the first quarter of 1998 was satisfactory, with a deceleration in inflation in the first few months and budgetary operations broadly in line with the target for the year. Teething problems in making the RRA operational, the delay until end-February 1998 in the effective implementation of the increase in the sales tax (ICHA), and the low level of beer production related to a shortage of skilled workers resulted in somewhat lower-than-envisaged revenue collection for customs, sales, and excise taxes. To recover these shortfalls during the rest of the year, the government has stepped up its efforts to make the organizational structure of the RRA fully operational (including the large-enterprise unit).

11. The main elements of the government's medium-term strategy are to (i) improve public resource mobilization and management, consistent with gradually increasing government savings and achieving a sustainable debt position over the medium term; (ii) maintain a stable macroeconomic environment conducive to private savings and investment through prudent financial policies; (iii) establish an institutional and infrastructure framework supportive of private sector activity and external competitiveness; (iv) strengthen the economic management and institutional capacity through public service reform and training; (v) develop human resources through a prioritization of expenditure toward education and health services; (vi) develop the rural economy and reduce poverty; and (vii) consolidate national reintegration and reconciliation and enhance governance and transparency.

12. Consistent with this strategy, Rwanda's economic policies are aimed at achieving the following macroeconomic objectives for the 1998/99-2000/01 to: (i) attain annual real GDP growth of about 8 percent a year; (ii) reduce the average inflation rate to no more than 5 percent by 1999; (iii) lower the external current account deficit (excluding official transfers) to 17 percent of GDP by the year 2000; and (iv) maintain gross official reserves at an average level of about 5 1/2 months of imports c.i.f. during the program period, in view of Rwanda's narrow export base and vulnerability to external shocks. Achieving these objectives and laying the basis for sustainable fiscal and government debt positions would require (i) an improvement in government savings of about 1 1/2 percentage points of GDP (mainly from improved revenue performance), in line with a gradually decreasing reliance on foreign financing of government investment; and (ii) a gradual increase in investment to 17 percent of GDP by the year 2000 (from 11 percent in 1997), largely through a recovery in private sector savings and investment to their pre-1994 levels and a deepening of structural reforms.

13. Underpinning the government's strategy and objectives are the following economic and structural policies for the three-year period. Fiscal policies will focus on (i) increasing the revenue-to-GDP ratio by about 1 1/2 percentage points to 11 3/4 percent in 2000 through a broadening of the tax base, the introduction of a value-added tax (VAT), and improvements in tax administration, with reduced reliance on trade taxes; (ii) significantly raising expenditure on goods and services for the social sectors while reducing unproductive spending through adequate expenditure prioritization and control; (iii) containing the government wage bill to below 4 1/2 percent of GDP by 2000, while improving real wages and the incentive structure and enhancing the average qualification of civil servants;² and (iv) improving the implementation capacity for, and quality of, capital expenditure. The program targets an improvement in the primary fiscal balance³ of 1 percentage point of GDP during 1998-2000. In addition, the government is programming during the program period exceptional social expenditure related to the cost of assistance to victims of genocide,⁴ the demobilization and reintegration of ex-soldiers into economic activity, civil service retrenchment and retraining, educational assistance for returned refugees, and the establishment of governance institutions. The cost of these programs -- estimated at a total of about 4 percent of GDP during 1998-2000 -- would be excluded from the targeted improvement in the primary fiscal balance. The government is seeking donor support for these programs, and their implementation will be phased in line with the availability of financing. To the extent that additional external financing is available, these programs will be extended and their implementation accelerated.

14. Monetary policy will continue to be market based with increased reliance on treasury bills and possibly central bank bills. 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 NBR aimed at smoothing excessive short-term fluctuations while meeting the government's official reserves target. Structural policies will concentrate on (i) reforming taxes and strengthening budget and treasury management; (ii) improving economic management capacity through reform of the civil service and; (iii) implementing trade reforms, privatization of public enterprises, and adoption of revised commercial, labor, and investment codes; and (iv) strengthening supervision of banks and nonbank financial institutions and rehabilitating commercial banks.

15. The macroeconomic targets for the first-year program (April 1998-March 1999) are to (i) achieve real GDP growth of 7 percent in 1998 and 8 percent in 1999; (ii) reduce end-of-period inflation to 7 percent by end-1998 and 5 percent by end-1999; and (iii) contain the external current account deficit (excluding official transfers) at about 20 percent of GDP in 1998 and at 18 1/2 percent in 1999 while increasing gross official reserves temporarily to about six months of imports c.i.f.

16. The government's fiscal program for 1998/99 takes into account the need to raise government wages and social sector spending while improving the country's revenue base in a sustainable manner. The primary fiscal balance (excluding exceptional social expenditure) is targeted to remain broadly in balance in 1998 and to improve to a surplus of about 0.4 percent of GDP in 1999. In this light, the program aims at improving the revenue-to-GDP ratio by 0.5 percentage point in both 1998 and 1999 (to 11.2 percent by 1999) while reducing import tariffs. The 1998/99 program also provides for exceptional social expenditure of RF 10.7 billion in 1998 (equivalent to 1.6 percent of GDP) and RF 10.6 billion in 1999 (1.3 percent of GDP), for which donor financing needs to be secured, possibly combined with prudent levels of domestic financing.

17. The following measures will contribute to achieving the targeted revenue-to-GDP ratio of 10.7 percent of GDP in 1998 (Table 1): (i) the full-year impact of the increases in excises on certain consumption goods introduced in the second half of 1997; (ii) measures introduced with the 1998 budget; and (iii) revenue administration measures. The government has stepped up its efforts to ensure that the RRA is fully operational and has strengthened the large-enterprise unit, which combines the functions of assessment, collection, and audit. In this context, tax identification numbers for all taxpayers will be introduced by September 1998, a presumptive income tax of 4 percent of turnover will be applied to small enterprises from mid-1998, and the collection of tax arrears will be pursued vigorously. Furthermore, the government has taken significant steps to strengthen the Customs Department, including through adequate control of underinvoicing, improved monitoring and assessment of petroleum imports, and a reduction in unjustified exemptions.

18. To bolster revenue over the medium term, the government will prepare in the course of 1998 further tax reforms for introduction with the 1999 budget, including a reduction in the maximum tariff to 25 percent, a lowering of coffee export tax, and the preparation of a VAT. Regarding the VAT, the government will adopt a plan covering the legal, administrative, publicity, and other steps to be taken before the introduction of the VAT, envisaged for the year 2000. As an intermediate step toward introduction of the VAT, the sales tax exemptions on imports of capital goods and transport equipment will be eliminated, with simultaneous introduction of an input credit mechanism for large enterprises.

Table 1. Rwanda: Revenue Measures for 1998

		Revenue impact in % of GDP	Implementation date
Tax measures introduced in the second half of 1997 (full-year impact)
(i)	Introduction of ad valorem rates and increase in excise taxes on soft drinks (35 percent), beer (60 percent), liquor, wine, and cigarettes (70 percent), and petroleum products (25 percent)	+0.4	July 1997 (October 1997 for petroleum)
Tax measures introduced with 1998 budget
(ii)	Increase in sales tax (ICHA) from 10 to 15 percent and broadening of its coverage	+0.5	Feb. 1998
(iii)	Decrease in maximum personal and company income tax rates (from 50 to 40 percent)	-0.6	Jan. 1997
(iv)	Reduction in maximum tariff rate (from 60 to 40 percent) and average tariff rate (from 25 to about 21 percent)	-0.4	Jan. 1998
Revenue administration measures
(v)	Reduction in underinvoicing through use of preshipment inspection, measures to reduce fraud, monitoring of petroleum imports and transit trade, elimination of unjustified exemptions for NGOs/diplomats, and reduction in exemptions through a system of tax credits for public investment-related imports	+0.4	1998
(vi)	Operationalization of the Rwanda Revenue Authority (including a strong large enterprise unit, and introduction of a taxpayer identification number for all enterprises) and application of a 4 percent turnover tax on enterprises with turnover of less than RF 100 million (4,000 enterprises to be covered in 1998)	+0.3	1998
(vii)	Collection by the budget of debt service on retroceded debt and dividends from public enterprises	+0.1	1998
Autonomous changes in 1998
(viii)	Lower coffee export tax proceeds related to projected lower coffee prices	-0.3
Total revenue effort		+0.4 percent of GDP	(to 10.7 percent of GDP)

19. Consistent with the revenue and primary fiscal balance targets, the government will contain noninterest current expenditure (excluding exceptional social expenditure) at RF 66.3 billion in 1998 (equivalent to 10.2 percent of GDP, about the same ratio as in 1997), while shifting expenditure allocations to social sectors through a reduction in unproductive spending. In view of resource constraints and pending the ongoing civil service reform, the government will contain the wage bill at RF 29.7 billion (RF 1 billion above the level in 1997, reflecting the higher cost of military food allowances). During 1998, the government will improve the quality of the civil service through retrenchment of unqualified workers and the reinsertion of qualified ones (a process that started at end-1997); the total size of the civil service (after removal during 1998 of ghost workers, estimated at about 2,000) will be kept at no more than 38,000 at end-1998 (from an estimated 40,600 at end-1997). As discussed in paragraph 37, the government will develop, in the course of 1998, a job description/classification system and a corresponding new and more decompressed wage structure (including the monetization of fringe benefits). The new wage structure will be implemented with the envisaged wage increase (at an average rate of about 25 percent) in the 1999 budget. As a result of these measures, the wage bill (net of savings on retrenchment, the removal of ghost workers, and demobilization of soldiers) is expected to decline to 4.6 percent of GDP in 1998 (from 5 percent in 1997) and remain at that level in 1999.

20. Recurrent expenditure on basic health and education (wage and nonwage recurrent outlays) will increase by about 50 percent, albeit from a low base, to almost RF 18 billion (equivalent to 25 percent of noninterest current expenditure in 1998), with a further significant increase in 1999. Special attention will be given to improving material supplies and to providing training for teachers and medical staff. The government will closely monitor the efficiency of this spending, including through social indicators such as school completion rates and the number of trained health workers (paragraph 43). With assistance from the World Bank, the government will undertake by September 1998, a public expenditure review of the education and health sectors that will assess the level, structure, and efficiency of recurrent and capital outlays. Based on the outcome of the public expenditure review, the social spending targets for 1999 and beyond will be reconsidered at the time of the midterm review, taking into account the availability of sustainable external budgetary support, the government's implementation capacity, and the impact on the program's monetary and inflation objectives. Regarding defense expenditure (projected at 3.8 percent of GDP in 1998, compared with an estimated 4.1 percent in 1997), the government will make every effort to obtain savings by implementing efficiency measures, thus laying the basis for a sustainable decline in the burden of defense on the budget in the medium term. Spending on other goods and services is projected to increase by 25 percent to RF 16.3 billion, with special emphasis, as noted above, on health and education sectors. In this context, the government will seek to contain nonessential expenditures; in particular, outlays related to travel abroad and vehicles could be reduced, including through a sale of government vehicles and a revised system of fuel allowances. Furthermore, to enhance transparency, extrabudgetary expenditure will be incorporated into the budget from 1998 onward.

21. The government's target for the primary fiscal balance (excluding exceptional social expenditure) is based on an appropriately ambitious revenue target that incorporates the expected yield from the actions by the RRA. However, the government will watch closely revenue developments in the course of the year based on monthly revenue targets and take revenue-enhancing or expenditure-reducing measures, as necessary, to reach the program's primary fiscal balance target. Such measures, to be taken in the context of the mid-1998 budget revision or in the second half of the 1998, could involve an increase in the excise tax on consumption goods and a reduction or postponement of lower-priority spending, such as fuel allowances and certain domestically financed capital spending.

22. Regarding the proposed exceptional social expenditure (which would be outside the primary fiscal balance monitored under the program), the government is proceeding with the establishment of governance commissions (RF 0.4 billion in both 1998 and 1999), the implementation of assistance programs for victims of genocide (RF 3.8 billion in 1998 and RF 4.5 billion in 1999), the demobilization of soldiers through departure allowances and reintegration programs (RF 3.1 billion in 1998 and RF 4.3 billion in 1999), the retrenchment of unqualified civil servants based on appropriate severance pay and retraining packages (RF 1.5 billion in 1998), and educational assistance for returned refugees (RF 1.9 billion in 1998 and RF 0.7 billion in 1999). If Rwanda receives external budgetary support in excess of the programmed amounts, the authorities will accelerate the implementation of these programs; the amount of such additional exceptional social expenditure during the period of the program will be consistent with the program's monetary and inflation targets (see paragraph 45).

23. The government envisages a 50 percent increase in capital expenditure in 1998 to a level of RF 77 billion (about 12 percent of GDP), mainly financed by external grants and highly concessional loans. This apparent strong increase reflects the above-mentioned underimplementation of the 1997 investment budget. The domestically financed part of the investment budget (RF 4 1/2 billion) is allocated to rehabilitation projects and the provision of agricultural inputs to farmers in need of support.

24. While preparing the 1998 development budget, the authorities introduced new procedures to improve the selection, programming, and monitoring of projects. In this context, the technical and financial monitoring capacity of the Investment Directorate of the Ministry of Finance will be further improved with assistance from the World Bank, the AfDB and the United Nations Development Program (UNDP). The public investment program (PIP) for 1999-2001, currently under preparation, will be reviewed as part of the public expenditure review process in consultation with World Bank and AfDB staffs.

25. Regarding domestic financing, after repaying RF 4 billion in domestic arrears on goods and services in 1997, the government intends to repay most of the remaining stock of arrears in the course of 1998 (i.e., an amount of RF 6.6 billion). The remaining identified stock of arrears (an amount of RF 3.6 billion, mainly owed to public enterprises) will be settled in 1999, partly against government claims on these public enterprises. With respect to bank financing, the government expects to reach agreement with the European Union on the use for the budget in 1998-99 of counterpart funds corresponding to fuel import support disbursed during 1995-97 (equivalent to about RF 2.2 billion), and of additional import support in an amount of ECU 8 million (equivalent to RF 2.7 billion).

26. During 1998/99, the government will strengthen its efforts to improve treasury and expenditure management, so as to avoid any accumulation of domestic arrears (Table 2). It will pay close attention to the effective operation of the recent decentralization of expenditure management to spending ministries, while maintaining a centralized system of "engagements" and payments (by the Budget and Treasury Directorates, respectively). It will also focus on effectively controlling the total number of staff and managing the payroll effectively, including through the removal of ghost workers from the payroll. The government will also take steps to improve budget prioritization and move further to integrate the recurrent and development budgets. To this effect, the government will, in the course of 1998, initiate a program- budgeting approach, beginning with the health and education sectors in the context of the World Bank-assisted public expenditure review. Furthermore, to enhance budgetary transparency and accountability, an Auditor-General's office will be established in early 1999, and the public procurement system will be strengthened through the adoption of a revised Central Tender Board law by mid-1998.

Table 2. Rwanda: Expenditure Management Measures for 1998/99

		Implementation date
(i)	Closely monitor the new decentralization of expenditure management	Ongoing
(ii)	Improve budgetary management through enhanced cash forecasting and monitoring	1998
(iii)	Commence computerization of budget and treasury management (with technical assistance from AfDB)	1998
(iv)	Strengthen the integration of recurrent and development budgets to improve budget prioritization (with technical assistance from the World Bank)	1998
(v)	Commence development and introduction of a system of public accounts	1998
(vi)	Promulgate an organic budget law	December 1998
(vii)	Transfer ministries' bank accounts to the treasury account with the NBR	End-1998
(viii)	Incorporate all extrabudgetary accounts into the national budget	1998
(ix)	Establish a strengthened central tender board	Mid-1998
(x)	Establish an Auditor General's office	Early 1999

27. During 1998, the government will complete the financial, organizational, and legal audits of the CSR with assistance from the International Labor Organization (ILO); it will also complete an actuarial study of the CSR's future financial liabilities and required assets. Based on these studies, the government will adopt by end-March 1999 an action plan that will involve reforming the CSR's organizational structure and determining the type of social security system and associated financial requirements; the action plan will also include the consolidation of the government's nonperforming debt to the CSR in the course of 1999. The government will remain current on its employer contributions to the CSR, and, pending the consolidation of its debt, it will pay RF 0.8 billion in arrears during 1998 to permit the technical functioning of the CSR.

28. Monetary and credit policies will be aimed at bringing down inflation (as measured by the end-of-period consumer price index) to no more than 7 percent by end-1998 while consolidating the NBR's net foreign assets position. In this regard, the government will monitor closely developments in banks' excess reserves and private credit expansion to avoid any inflationary pressure on the demand side. Broad money growth is projected at 17.3 percent in 1998, slightly above projected nominal GDP growth, as a gain in confidence is expected to follow the abatement of inflation and the strengthening of banks' financial positions. Taking into account a projected small increase in the money multiplier arising from the banks' expected drawdown of excess reserves, the program targets a growth rate of reserve money of 16.3 percent and, consistent with the NBR's net foreign assets target, an increase in net domestic assets of the NBR of RF 0.4 billion in 1998 (Annex Table 1). Consistent with adequate private sector credit growth, the target for the change in net credit to the government is RF 0.8 billion, in part on account of the government's use of counterpart funds.

29. With a view to enhancing the flexibility of the NBR's monetary management, as well as to meeting the financing needs of the treasury, the government will accelerate preparations so that treasury bills can be introduced in the third quarter of 1998. In this regard, the authorities intend to request soon technical assistance from the Fund, and to ensure adequate coordination between the Ministry of Finance and the NBR. The NBR also intends to promote the development of a secondary market for the newly issued treasury bills. Furthermore, with a view to improving transparency and optimizing the management of government liquidity, all ministries' accounts with commercial banks (with deposits totaling RF 9 billion at end-1997) will be transferred to the treasury account with the NBR before end-1998. To alleviate liquidity problems for the banks involved, the NBR intends to reduce reserve requirements, consistent with the program's monetary targets, and is studying other possible remedies. The NBR is also examining with the authorities the remuneration of government deposits. While the financial position of other banks has improved since late 1996 with the implementation of restructuring plans, several banks continue to face weaknesses. The government will complete new financial audits of all commercial banks by September 1998, and it will revise or draw up adequate restructuring plans, if necessary, involving provisioning and recapitalization. The revised banking law, which authorizes the NBR to issue and amend prudential regulations for banks and nonbank financial institutions, will be submitted to parliament by mid-1998. In this regard, the NBR intends to enhance the regulatory framework for rural cooperative savings and loans associations in the course of 1998. Furthermore, the government intends to liquidate the Caisse d'épargne and liquidate or privatize the Caisse hypothécaire (both majority public owned) by March 1999.

30. External sector policies will be guided by the need to strengthen exports through trade reforms and investment promotion, liberalization of the tea and coffee sectors, and cost reductions in the energy and telecommunications sectors (as described in the following subsection). Regarding external debt and financing, Rwanda will seek a concessional rescheduling of current debt service and arrears owed to bilateral and commercial creditors, a refinancing of current debt service and arrears owed to certain multilateral creditors, and coverage of the remaining financing gap from multilateral creditors and donors.

31. Projections for 1998 indicate significant declines in world prices for coffee and only moderate increases in tea and coffee production; as a result, exports in U.S. dollars are projected to decline modestly from their 1997 level. Imports in U.S. dollars are expected to grow by 15 percent in U.S. dollar terms, reflecting strong real GDP and investment growth. Consequently, the external current account deficit (excluding official transfers) is projected to widen to just over 20 percent of GDP (from 17 1/2 percent of GDP in 1997). Taking into account projected official transfers and external financing of investment projects, the overall balance of payments deficit is expected to amount to about US$80 million in 1998. With the projected regularization of external arrears (estimated at about US$97.5 million at end-1997), the financing gap for 1998 is projected at US$192 million (and US$17 million for the first quarter of 1999). Of the financing requirements in 1998, an amount of US$30 million would be covered by the remainder of the 1997 World Bank economic reintegration and recovery credit.

32. For the period 1998-early 2001, the government intends to seek a rescheduling on Naples terms from Paris Club creditors and on at least comparable terms from non-Paris Club official bilateral and commercial creditors. The government is also approaching multilateral creditors (other than World Bank, the AfDB, and the International Fund for Agricultural Development (IFAD)), with a view to eliminating Rwanda's arrears (estimated at about US$37 million) and obtaining new concessional financing. For the remaining financing gap, the government is seeking financial support on highly concessional terms from the World Bank, the AfDB, the European Union (through respective operations parallel to the Enhanced Structural Adjustment Facility (ESAF)), and bilateral donors. In this context, a meeting will be convened, under the auspices of the World Bank, in early June 1998 to seek donor assistance for the program, including for debt service falling due to the World Bank, AfDB, and IFAD.

33. Rwanda's external debt situation is likely to remain very difficult in the medium term. The updated debt sustainability analysis, prepared jointly with Fund and World Bank staffs, indicates that Rwanda's net present value of debt-to-exports ratio, after application of traditional debt-relief mechanisms, will remain on the order of 600 percent, during the 1998-2000 period, before declining to about 400 percent by the year 2004. The government expects, therefore, to seek qualification for assistance under the initiative for Heavily Indebted Poor Countries (HIPC Initiative), after establishing a satisfactory track record under ESAF-supported programs.

34. The government intends to accelerate trade reforms in 1998, with a view to complying with most of the objectives of the Cross-Border Initiative (CBI) by early 1999. To this effect, a uniform import duty rate of zero for capital goods, as well as low rates for raw materials and semiprocessed goods (uniformly applied to all users), will be adopted with the 1999 budget; the maximum and average import duty rates will be reduced to 25 percent and about 15 percent, respectively; and tariffs on intraregional trade will be eliminated. Furthermore, the government intends to replace the existing 4 percent Magerwa tax by a 3 percent statistical tax (with no exemptions), starting with the 1999 budget. To accelerate the recovery of coffee production, the export tax on coffee will be reduced in 1999 and eliminated with the 2000 budget. Furthermore, the government intends to implement an effective duty and sales tax drawback system for imported inputs used in the production of exports.

35. Rwanda's exchange system is free of exchange restrictions; existing foreign exchange limits for invisible transactions are indicative and all bona fide requests for such transactions are being granted on a nondiscretionary basis. The NBR will further enhance the functioning of the foreign exchange market by informing economic agents about the cost advantage of bank settlement instead of cash transactions (currently causing a premium for dollar bills above the officially quoted rate on banks' exchange transactions). Furthermore, the government intends to adopt Article VIII status under the Fund's Articles of Agreement as soon as possible and intends to shortly inform the Fund of this intention. During the period of the first annual arrangement, the government will neither impose or intensify restrictions on payments and transfers for current international transactions, introduce multiple currency practices, conclude any bilateral payments agreements that are inconsistent with the Fund's Articles of Agreement, nor impose or intensify import restrictions for balance of payments reasons.

36. In addition to structural reforms in the fiscal, financial, and external sector areas, the government attaches high priority to reforming the civil service, demobilizing soldiers and reintegrating them into society, privatizing public enterprises, and developing the private sector.

37. The government's objective is to establish a streamlined, better-paid and more qualified civil service, within an appropriate target for the wage bill. The government will take steps to rationalize the functions of the civil service, streamline recruitment procedures, and assess institutional capacity needs. From the core civil service (excluding teachers), estimated at 13,600 at end-1997, at least 2,850 unqualified civil servants will be retrenched, with appropriate severance payments incorporated in the 1998 fiscal program. New recruitment of qualified staff will take place only gradually -- and up to a limit of 2,000 new staff in 1998 -- while the government first meets the priority needs in health care, the justice system, and agriculture and remains within a target size for the core civil service of not more than 12,800 at end-1998. The target for the number of teachers (after the removal of ghost workers by end-September,⁵ based on a census to be completed by June 1998) is set at 25,200 for end-1998. The targets for the civil service in 1999-2001 will also be examined in the context of the public expenditure review of the health and education sectors, to be undertaken in September 1998. Furthermore, to improve incentives, the government will develop a job description/classification system and adopt at end-1998, a revised pay structure for the civil service⁶ for implementation in the 1999 budget.

38. Consistent with its demobilization program, which was prepared with assistance from World Bank and UNDP staffs, the government intends to continue the process of demobilizing and reinserting former soldiers into productive civilian life. The demobilization program provides short-term assistance to demobilized soldiers in the form of cash allowances, estimated at about RF 1.7 billion a year in both 1998 and 1999 (included under exceptional social expenditure). In addition, the government is setting up, with support from the UNDP and donors, programs to provide longer-term economic assistance to demobilized and former soldiers, in particular, vocational training and microcredit schemes.

39. The government has decided to accelerate the privatization process to cover all public enterprises. It has adopted an action plan and timetable for offering for sale 55 enterprises during 1998-99 (of which 43 will be offered for sale by March 1999), and the sale of the government's minority shares in 13 other enterprises in the year 2000 (Annex Table 2). Priority is being given to the sale of tea and coffee factories, as well as the public utilities. To speed up the evaluation and offer for sale of identified enterprises, the government is strengthening the technical support unit of the National Privatization Commission (with technical assistance from the World Bank and the UNDP). It will also more widely publicize the offers for sale and the selection of bids and sensitize the public about the privatization process. Regarding telecommunications, the government will prepare, with World Bank assistance, a regulatory framework to permit private sector participation in the sector, laying the basis for the privatization of the telecommunications company (Rwandatel) by late 1999. To enhance transparency in the financial relations between the government and Rwandatel, the audited accounts of Rwandatel will be published and the cross debts between the government and the company regularized in the course of 1998. Furthermore, the government will ensure that the management contract with a private operator to improve the performance of the electricity/water/gas company (Electrogaz) will be effective by end-September 1998. The government plans to review in 1998 the options for restructuring the company, including its possible separation into three entities followed by privatization. A regulatory framework for private sector participation in the energy sector will be prepared in 1999.

40. During 1998, the government will proceed with the reform of the regulatory environment for private sector activity. The government will complete a revised labor code to submit to parliament in the course of 1998. The revised code will, inter alia, eliminate discriminatory gender provisions, restrictions on labor mobility, and wage controls and minimum wage stipulations. Furthermore, the government is committed to reducing the normal company tax rate from 40 to 35 percent, from the year 2000, followed by a further reduction to 30 percent. With a view to promoting foreign and domestic investment and exports, the government will establish in 1998 the Rwanda Investment Promotion Agency which will serve as a one-stop center for new investors and facilitate the implementation of investment proposals and the envisaged free export economic zones (FEEZs). The Investment Promotion Act (expected to be adopted in 1998) will provide a level playing field for all investors. With a view to minimizing discrimination between investors and loss of tax revenue, fiscal incentives will be based on the Income Tax Law (i.e., through accelerated depreciation allowances) and the tariff code (i.e., through zero or low import duty rates for capital and intermediate goods). To attract export production, the government is considering temporary and time-bound company income tax concessions for investors in the FEEZ; it will determine the modalities of such concessions in dialogue with Fund and World Bank staffs. Other discretionary incentives will be limited to well-defined cost recovery for training and infrastructure investment (to promote investment in certain regions). Imports for the FEEZs will be free of duty and sales tax, but imported inputs entering production for domestic sales will be subject to the normal import and sales taxation. All other imported and locally purchased inputs by investors under the Investment Code will be subject to sales tax, with the application of an input credit mechanism for domestic sales and a refund system for exports. Exports produced outside the FEEZ will benefit from the duty and sales tax drawback system.

41. The macroeconomic database of Rwanda suffers from weaknesses, in part owing to the genocide, which impair the government's ability to analyze economic developments in a timely manner. These problems are being addressed under technical assistance programs agreed with the Fund and other external agencies. The government is committed to speedily implementing the programs, including through the provision of staff and other resources.

42. A critical element of the government's socioeconomic policy is reducing the incidence of poverty. It is estimated that over 70 percent of households are currently below the poverty line, with a high concentration in rural areas. As discussed in the government's policy framework paper, the authorities will adopt a range of measures to improve rural incomes, including by stimulating agricultural productivity, improving the distribution of inputs, upgrading rural infrastructure and product markets, strengthening the rural credit market through the restructuring of rural cooperative savings and loans associations, and implementing targeted poverty alleviation programs at the grassroots level. A significant improvement in the status of, and opportunities for, women will be pursued through changes in the laws concerning property rights, and through educational programs to ensure compliance with these laws.

43. Improving the quality and accessibility of basic health and education services is a key element in the government's antipoverty strategy. In this regard, the budget allocations for health and education will be significantly increased during 1998-2000 (see paragraph 20). In primary health care, special emphasis will be put on improving the quality and geographical distribution of health workers, increasing child immunization rates, and preventing AIDS and malaria. In education, the government's policy will focus on improving the quality and geographical distribution of teachers, as well as enrollment rates and transition rates from primary to secondary schools. Progress in these areas and in poverty reduction will be monitored on a regular basis; in this context, the government will establish an observatoire within the Ministry of Gender, Family, and Social Affairs, which will work closely with the Statistics Directorate of the Ministry of Finance and Economic Planning and other concerned social ministries, and will strengthen the survey capacity of the Statistics Directorate.

44. During the 1998-99 period, the authorities will further strengthen Rwanda's capacity for managing the economy, implementing structural reforms, compiling economic statistics, and monitoring external debt, in close collaboration with the Fund, World Bank, AfDB, UNDP, and other donors. The program for technical assistance in the macroeconomic management area (thus far focusing mainly on capacity-building efforts for the Ministry of Finance and the NBR) has recently been updated, and the Ministry of Public Services has been included in the program. Funding requirements are secured only partly (through an AfDB grant), and the government is seeking financial support from other multilaterals and donors to fill the remaining need. To strengthen the effectiveness, coordination, and national ownership of the technical assistance program, an interministerial steering committee (composed of the ministries of Finance and Public Services and the NBR) was established in May 1998; it is working closely with the staffs of the Fund, World Bank, AfDB, and UNDP. These efforts will be paralleled by ongoing capacity-building programs aimed at strengthening the programming units of other government institutions.

45. Progress in economic policy implementation under the program will be monitored through quantitative and structural performance criteria and benchmarks (Annex Tables 1 and 2). The program contains contingency mechanisms to mitigate the impact of shortfalls or excesses in external budgetary support and of shortfalls in export tax revenues related to lower-than-programmed world prices. In this regard, the floor on net foreign assets of the NBR will be adjusted downward, and the ceilings on net domestic assets of the NBR and on net credit to government of the banking system will be adjusted upward for any shortfall in disbursed external budgetary support below programmed levels; a maximum of RF 4 billion on the upward adjustment of net domestic assets of the NBR and net credit to government during 1998 (and a cumulative RF 5 billion for March 1999) will be allowed. If disbursed external budgetary support exceeds the programmed level, the excess can be used for additional exceptional expenditure above programmed levels, as defined in paragraph 22, with a maximum of RF 4 billion during the program year. The remaining excess will be reflected in a pro tanto upward adjustment of the floor on net foreign assets of the NBR and an identical downward adjustment of the ceilings on net domestic assets of the NBR and net credit to government. Furthermore, if a shortfall in export tax proceeds, caused by lower-than-projected coffee export prices, is not offset by other revenues, the floors on the primary fiscal balance and net foreign assets of the NBR will be adjusted downward and the ceilings on net credit to government and net domestic assets of the NBR will be adjusted upward by half the amount of the export tax shortfall. The ceiling on net credit to government will be adjusted downward for any privatization proceeds in excess of the program target. Also, the ceiling on net domestic assets of the NBR will be adjusted downward for the transfer of government deposits from commercial banks to the treasury account with the NBR, as envisaged under the program. As noted above, the program also envisages that additional revenue-enhancing and expenditure-reducing measures will be implemented in 1998 to offset any revenue shortfalls and safeguard the primary fiscal balance target.

46. The government has taken the following actions prior to approval of the ESAF arrangement by the Executive Board: (i) adoption of an action plan for civil service reform, for implementation during 1998; (ii) adoption of a timetable for the offer for sale or liquidation during 1998-99 of 55 public enterprises identified for divestiture; and (iii) establishment of an interministerial/NBR committee to monitor implementation of the government's economic program.

47. The implementation of policies will be subject to a midterm review by the Fund, to be completed no later than end-December 1998. The review will assess policy implementation and economic performance, with particular emphasis on the government's budget for 1999. The completion of the review, together with the observance of the end-September 1998 quantitative and structural performance criteria, and agreement with the Fund on the 1999 budget, will be a condition for the second loan disbursement under the first annual ESAF arrangement.

¹The underlying revenue effort in 1998 is underestimated as a result of the reimbursement in 1998 of taxes collected in 1997.

²The program targets for the wage bill exclude fringe benefits, which are to be monetized with the 1999 budget.

³Defined as revenue minus noninterest current expenditure and domestically financed capital expenditure; exceptional social expenditure is excluded from the primary fiscal targets.

⁴A special fund has been established for the victims of genocide. The fund, to be administered by a board under the auspices of the Ministry of Gender, Family, and Social Affairs in collaboration with other concerned ministries, will assist orphans, handicapped, and other victims through education, housing, basic social services, and income transfers.

⁵A structural performance criterion under the first-year program.

⁶Including a decompression of salary scales and a monetization of fringe benefits.

Table 1. Rwanda: Quantitative Performance Criteria and Benchmarks Under the First Annual ESAF Arrangement, 1998/99

	1997	1998				1999
	Dec. Act.	Mar. Est.	June Prog.	Sep. Prog.1	Dec. Prog.	Mar. Prog.
		(Cumulative flows since beginning of year, in billions of Rwanda francs; unless indicated otherwise)
Financial benchmarks or performance criteria
Net foreign assets of the NBR (stock)2 3	27.8	27.7	29.9	31.1	33.5	34.7
Net credit to the government from the banking system (stock)4 5 6	10.4	6.1	11.8	10.8	11.2	11.2
Net domestic assets of the NBR (stock)4 6 7	9.7	8.5	10.6	9.5	10.1	8.6
New nonconcessional external borrowing8	0.0	0.0	0.0	0.0	0.0	0.0
Short-term external debt (stock)9	0.0	0.0	0.0	0.0	0.0	0.0
Primary fiscal balance2 6 10	1.5	-0.8	-3.9	0.3	-1.4	2.6
Net repayment of domestic arrears (-)11	-3.9	...	-2.2	-4.4	-6.6	-0.7
Net stock of outstanding nonreschedulable external arrears (in millions of U.S. dollars)12	34.9	36.6	36.6	36.6	0.0	0.0
Indicative targets
Reserve money (stock, ceiling)	37.5	36.2	40.5	40.6	43.6	43.3
Budgetary revenue2	58.1	12.4	28.3	48.7	69.5	18.4
Wage bill13	28.7	6.5	14.6	22.0	29.7	7.7
		(Cumulative flows since beginning of year)
Memorandum items:
Exceptional social expenditure (in billions of Rwanda francs)	1.0	0.6	3.2	7.0	10.7	2.6
Programmed external budgetary support (in millions of U.S. dollars)	...	14.4	40.9	56.2	117.2	18.6
Of which: European Union	...	0.0	0.0	0.0	5.0	5.0
African Development Bank (AfDB)	...	0.0	0.0	5.0	12.0	0.0
World Bank	...	12.4	30.0	35.0	40.0	10.0
Expected refinancing by multilaterals14	...	0.0	1.7	3.4	41.7	1.8
Other donors	...	2.0	9.2	12.8	18.5	1.8
Programmed export tax proceeds (in billions of Rwanda francs)	4.3	0.4	1.4	2.3	3.0	0.3
Program exchange rate (RF per U.S. dollar)	302.4	317.0	317.0	317.0	317.0	326.2
1 Performance criteria for end-September 1998.
2 These figures represent a floor.
3 These floors are to be adjusted downward for any shortfall in disbursed external budgetary support vis-à-vis the programmed amounts. However, the downward adjustment cannot exceed RF 2 billion by June 1998, RF 3 billion by September 1998, RF 4 billion by December 1998, and RF 5 billion by March 1999. In the case of an excess in budgetary support, the amount of the excess not spent on additional exceptional social expenditure (as described in footnote 4) will be reflected in a pro tanto upward adjustment in the floors on net foreign assets of the NBR. In the case of a shortfall in coffee export tax revenue (as described in footnote 6), the floors on net foreign assets of the NBR will be adjusted downward by one half of the shortfall.
4 These ceilings are to be adjusted upward for any shortfall in disbursed external budgetary support vis-à-vis the programmed amounts. However, the upward adjustment cannot exceed RF 2 billion by June 1998, RF 3 billion by September 1998, RF 4 billion by December 1998, and RF 5 billion by March 1999. In the case of an excess in budgetary support, the excess can be used for additional exceptional social expenditure (as defined in paragraph 22 of the Memorandum of Economic and Financial Policies) with a maximum of RF 4 billion during the program year. Any remaining excess will be reflected in a pro tanto downward adjustment of the ceiling on net domestic assets of the NBR and net credit to government.
5 The ceiling on net credit to government is to be adjusted downward for any privatization proceeds (net of privatization costs) above the programmed amount (of RF 1.6 billion in 1998, and zero in 1999).
6 In the case of a shortfall in coffee export tax revenue, owing to lower-than-projected coffee export prices (as specified in the Technical Memorandum of Understanding) which is not offset by other revenue, the ceilings on net domestic assets of the NBR and net credit to government will be adjusted upward, and the floors on the primary fiscal balance will be adjusted downward, by one half of the amount of the shortfall in export tax revenue.
7 The ceiling on NDA of the NBR is to be adjusted downward by the cumulative amount of government deposits with banks, which are transferred to the Treasury account with the NBR (estimated at RF 9.1 billion at end-1997).
8 Credits with a maturity of more than one year. Concessional loans are defined as loans with a grant element in excess of 35 percent on the basis of currency-specific commercial interest reference rates as described in the Technical Memorandum of Understanding. Debt rescheduling and restructuring are excluded from the borrowing limits.
9 Debt (excluding normal import-related credits) with a maturity of up to one year.
10 The primary fiscal balance is defined as total revenue (excluding privatization proceeds) minus current expenditure (excluding scheduled interest payments and exceptional social expenditure) minus domestically financed capital expenditure.
11 The programmed repayment of domestic arrears during 1998 excludes unconfirmed claims related to pre-1994 goods and services which are subject to a court decision.services which are subject to a court decision.
12 In addition, there is a continuous performance criterion on the nonaccumulation of new external arrears.
13 Includes food allowance for the army and employer social security contributions.
14 The cumulative flow for December 1998 includes the expected refinancing of arrears outstanding as of end-March 1998.