Kigali, December 30, 1998

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

Dear Mr. Camdessus:

1. We recently held discussions with the Fund on the midterm review of Rwanda's program for April 1998-March 1999 which is supported by the first annual arrangement under the Enhanced Structural Adjustment Facility (ESAF), approved by the Executive Board of the Fund on June 24, 1998. The discussions focused on progress made under the program, policies and actions to be pursued during the remainder of the program year, as well as the 1999 budget. The program's quantitative and structural performance criteria and benchmarks at end-September 1998 have been met, with the exception of the performance criteria on net foreign assets of the National Bank of Rwanda and the net repayment of domestic arrears. Furthermore, agreement has been reached with the Fund staff on the 1999 budget (a condition for completion of the midterm review).
2. The attached memorandum of economic and financial policies (MEFP)--which updates the government's policies set out in the government's letter and attached memorandum, as well as the government policy framework paper of June 4, 1998--reviews progress in implementing the program and sets out the actions the government is taking to reach the program targets for end-December 1998. It also describes the policy understandings under the 1999 budget which is in line with the original program targets for 1999. Given the nature of the nonobservance of the performance criteria and the remedial measures and commitments undertaken by the government of Rwanda, as described in the MEFP, the government requests waivers for the nonobservance of the end-September 1998 performance criteria.
3. In support of the program, the government hereby requests the second disbursement of SDR 11.90 million under the first annual arrangement, following the completion of the midterm review by the Fund's Executive Board. The government understands that consideration by the Executive Board of Rwanda's request for waivers of the above-mentioned two performance criteria and for the completion of the midterm review will be subject to Rwanda's meeting the original quantitative targets for these two variables at end-December 1998 (except for an adjustment of the target for net domestic arrears repayment), as well as the prior actions set out in the Tables in the attached MEFP.
4. 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.

Attachment: memorandum of economic and financial policies

1. Macroeconomic developments through September 1998 remained broadly in line with program objectives. Real GDP growth is now estimated at about 10 percent in 1998, compared with 7 percent under the program, reflecting mainly buoyant agricultural production (particularly food). The manufacturing and services sectors are also estimated to be recovering at a fast pace. With the improvements in supply conditions, food prices (which rose sharply in the second half of 1997) declined, and the rate of inflation (measured by the consumer price index in Kigali) decelerated to about 2.5 percent in the 12-month period ended September 1998 (from 17 percent in December 1997), compared with a program target of 7 percent at end-1998.
2. The Rwanda franc, which remained stable against the U.S. dollar during 1997 and early 1998, has depreciated vis-à-vis the U.S. dollar during December 1997-October 1998 by about 5 percent--much slower than expected under the program--and the parallel market premium which reached about 10 percent at end-1997/early 1998, has remained at about 5 percent since May 1998. Since end-December 1997, the Rwanda franc has depreciated by about 15 percent in real terms, offsetting in part the real appreciation (by 27 percent) that occurred in 1997.
3. The primary fiscal balance during the first three quarters of 1998 recorded a surplus of RF 0.3 billion within the target under the program, as shortfalls in revenue of about RF 3 billion (equivalent to 0.4 percent of GDP) were more than offset by lower primary expenditure (on a payment order basis).
4. The shortfalls in revenue emanated from excise taxes (reflecting lower production of beer and soft drinks); import tax and coffee export tax proceeds (reflecting lower volumes and international prices); nontax revenue (reflecting administrative problems at the ministries and local levels); and delays in subjecting small and medium-sized enterprises with annual turnover of below RF 60 million to the optional 4 percent presumptive turnover tax. These shortfalls were partly offset by the strong collection of income taxes, reflecting the strengthening of the assessment and auditing of large enterprises by the Rwanda Revenue Authority (RRA). Progress was also made in assigning tax identification numbers to large enterprises.
5. Primary expenditure at end-September 1998 amounted to RF 45 billion, about RF 4 billion lower than programmed. The military wage bill exceeded the program target by over RF 2 billion, which was however, more than offset by underexpenditure on the civil service wage bill. The higher military wages reflected the reintegration of returned soldiers (10,000) of the prewar government in the course of 1998 as well as higher-than-programmed food costs. The lower expenditure on civil service wages was due to savings from the retrenchment of about 2,850 unqualified civil servants and the removal of about 3,500 ghost workers. Expenditure on goods and services, as well as on domestically financed capital projects has been well below the program projections, but there has been a shift of expenditures to security-related outlays, with military expenditure at end-September reaching its overall budget appropriation for 1998. Spending on basic social services was somewhat below the program target, reflecting underspending on education as new hiring of qualified teachers was lower than envisaged. Domestically financed capital expenditure was less than one-fourth of the programmed level (of RF 3.5 billion), reflecting the authorities' efforts to restrain commitments. The implementation of exceptional social expenditure was much slower than envisaged, largely because of delays in the preparation of assistance programs for target groups and shortfalls in external financing. However, the government made a transfer to the fund for assistance for genocide victims, as envisaged under the program.
6. Foreign-financed capital expenditure is estimated to have been much below the program target because of delays in donor disbursements and capacity problems in spending ministries. On expenditure management, domestic arrears (identified at end-1997) were partly repaid, the decentralization of expenditure management to line ministries operated satisfactorily, the payment of civil servant wages through individual bank accounts was introduced, and a National Tender Board commenced operations aimed at improving transparency and value-for-money in government purchases. On the downside, payroll management needs further improvements (as discussed below), and the adequate monitoring of commitments, payment orders, and payments is not yet in place, contributing to the accumulation of new domestic arrears (estimated at almost RF 3 billion at end-September), including on wages. The accumulation of these arrears coincided with the presence of room under the programmed net credit to government from the banking system, pointing to a lack of adequate cash management at the treasury.
7. On monetary developments, all program objectives except for the net foreign assets (NFA) of the National Bank of Rwanda (NBR) were achieved. The NFA target was not observed because of shortfalls in external budgetary support, as well as lower coffee export receipts. The NBR's intervention in the foreign exchange market, which was aimed at accommodating the needs of the commercial banks, also contributed to the lower-than-targeted NFA. This development combined with the limited net use of government bank credit led to a significant drop in reserve money and a tighter liquidity situation of banks. At the same time, money demand was subdued, reflecting in part the relatively faster growth of the nonmonetized sectors and, to some extent, the holding of foreign currency outside the banking system, perhaps because of uncertainties related to the conflict in the Democratic Republic of the Congo (DRC). As a result, broad money grew by about 10 percent during the 12-month period ended September, well below the program target. During the period, buoyant private sector credit demand was met by banks through a reduction of their excess reserves, and helped by the NBR's lowering of the required reserve ratio. Reflecting overall tight credit policy, money market interest rates edged up during the third quarter, and real interest rates became strongly positive.
8. Preliminary data indicate that overall exports were lower than programmed mainly because of a steeper-than-expected decline in coffee prices, as well as lower production. These developments were accompanied by lower-than-projected imports during the first eight months of the year because of transport problems related to El Niño in neighboring countries, the tapering off of humanitarian food aid, a weak implementation of the public investment program, and lower-than-programmed exceptional social spending by the government.
9. The government proceeded with the retrenchment of unqualified civil servants (about 2,850) and the removal of identified ghost workers (about 3,500); through end-September 1998, the recruitment of qualified staff was lower than the program target. With World Bank assistance, progress has been made in developing a job classification system, a new pay structure, and a new organizational structure for ministries. However, further work is necessary before the reforms can be implemented. The civil service census (envisaged for end-June 1998) was delayed. With the assistance of the World Bank and the United Kingdom's Department for International Development (DFID), the government undertook a social sector expenditure review (SSER) of the health, education, water and sanitation sectors. The SSER was used in developing the 1999 budget and is the basis for consultations with donors on budgetary support. The privatization program is being implemented as envisaged, with an estimated 31 public enterprises offered for sale (compared with the end-September 1998 benchmark of 20 enterprises), including several coffee and tea factories, and 4 enterprises under liquidation; thus far, the sale of 11 enterprises has been finalized. Nevertheless, the full proceeds of the sales were not received because of delays in preparing title deeds for the privatized enterprises.
10. On financial sector reform, the preparation of treasury bills--although somewhat delayed--is well advanced and the audits of commercial banks are expected to be undertaken before end-1998; the final reports will be completed by end-March 1999. The draft banking law was submitted to parliament by end-November 1998. Progress was also made in enforcing the limits on the net open foreign positions of commercial banks, and by September banks had reduced their net open positions to levels close to the limit of 20 percent of own capital.
II. Policy Measures for the Remainder of 1998
11. In the period ahead, the authorities are committed to implementing remedial measures and achieving the program targets for the year as a whole. On the fiscal front, the revenue shortfall (before measures) vis-à-vis the original program target for 1998 is estimated at about RF 8 billion. In early November, the authorities initiated revenue-enhancing and expenditure-restraining measures--including a safety margin to accommodate any unforeseen slippages-- to bring the primary deficit well within the program target for end-December 1998. On the revenue side, these measures include (see Box 1) (i) a vigorous implementation of the presumptive turnover tax of 4 percent on small enterprises; (ii) the full establishment by end-December 1998 of the Large Enterprise Unit (LEU) under the Tax Commission of the RRA with adequately staffed tax assessment, collection, and audit divisions; (iii) a stepped-up collection of nontax revenue; (iv) the vigorous collection of tax arrears, including from public enterprises; and (v) the collection of dividends and debt service on retroceded debt from public enterprises. With the adoption of these measures, the authorities anticipate limiting the overall revenue shortfall in 1998 to not more than RF 4 1/2  billion (or 0.7 percent of GDP). Furthermore, to prepare for the introduction of a value-added tax (VAT) in the year 2000, the authorities will adopt a VAT implementation plan by end-December 1998 and have requested technical assistance for the design and drafting of the law from the Fund.

Box 1. Rwanda: Remedial Actions to Reach the Fiscal Targets for End-December 1998
	Revenue impact (in billions of Rwanda francs)	Implementation date
Revenue
Accelerate enforcement of the presumptive tax of 4 percent on annual turnover for small and medium enterprises	0.2	End-Dec. 1998
Improve collection of nontax revenue through a reorganization and improved control of local receivers; and carry out an external audit of the main public agencies levying administrative fees	0.1	End-Dec. 1998 End-March 1999
Collect tax arrears and taxes due from identified public enterprises1	3.1	End-Nov. 1998
Collect debt service on retroceded debt and dividends from identified public enterprises and private enterprises in which the government has shares2	0.6	End-Dec. 1998
Operationalize fully the Large Enterprise Unit (under the Tax Commission of the Rwanda Revenue Authority) with adequately staffed tax assessment, collection, and audit divisions		End-Dec. 1998
Expenditure control
Repay domestic arrears as of end-1997 and limit the net accumulation of new domestic arrears to the normal float3 of not more than RF 1.5 billion4		End-Dec. 1998
Reduce commitments on nonpriority expenditure by RF 1 billion		Mid-Nov. 1998
Introduce a system to monitor all government bank accounts with the NBR and commercial banks, separating treasury, ministries, and autonomous government agencies5		Early Feb. 1999
1 The identified public enterprises are Electrogaz, Ocircafé, Ocirthé, ONP, and Rwandatel. 2 The identified enterprises include the Rwanda Development Bank (BRD). 3Determined on the basis of normal delays between payment orders and payments. 4Prior action for completion of the midterm review. 5Such as the Rwanda Revenue Authority.

12. On primary expenditure, the authorities remain committed to offsetting the projected revenue shortfall through savings in nonpriority expenditure (including on domestically financed capital projects), while protecting social sector spending in line with the program targets for 1998. The shift of expenditure toward defense outlays in 1998 has been necessitated by the security needs related to the conflict in the DRC, the need to reintegrate 10,000 soldiers of the prewar government to enhance national reconciliation and improve security in the northwestern part of the country, and delays in implementing the second round of the demobilization program. However, the authorities are committed to contain defense outlays at 4.1 percent of GDP in 1998 (compared with 3.8 percent under the program). In this regard, the authorities are going ahead with the demobilization of 3,600 soldiers before end-1998.
13. The authorities will implement several measures to further strengthen expenditure management (Box 1). The recording and monitoring of expenditure commitments (engagement), payment orders (ordonnancement), and payments will be strengthened so as to respond promptly to the emergence of abnormal delays in the signing of payment orders and avoid the accumulation of arrears. The stock of domestic arrears (including new arrears accumulated in the course of 1998, estimated at RF 3.0 billion) will be further reduced in line with the program target for end-December 1998, adjusted for the normal "float" (defined as the acceptable difference between payment orders and payments, i.e., an amount of RF 1.5 billion through end-March 1999 and RF 1.0 billion thereafter).
14. The authorities are committed to achieving the program's NFA target for end-December 1998 (after the adjustments allowed under the program for shortfalls in disbursed external budgetary support and in coffee export tax receipts). In this regard, the NBR is committed to pursuing a more active exchange rate policy in line with its NFA target, while offsetting any excessive monetary impulse created by these operations through the money market as necessary. Moreover, the authorities will make a concerted effort to accelerate the disbursement of pledged budgetary support, particularly from the African Development Bank (AfDB) and bilateral donors.
15. The authorities will accelerate key structural reforms (Box 2). The civil service census was carried out in mid-December 1998, to be completed by mid-January 1999 to pave the way for the removal of any remaining ghost workers, as well as the implementation of the new job classification system and the placement of staff into the new organizational structure of ministries. With regard to public enterprise reform, the financial audit of the 1997 financial accounts of Rwandatel was completed by mid-December 1998, to be published by mid- January 1999. The commission investigating the cross debts of the government and public enterprises will issue a report and agreement will be reached between the government and public enterprises in settling these debts before end-February 1999. Other reforms to be implemented before end-1998 are the adoption of revised exchange regulations to further liberalize and simplify the exchange regime; the issuance of treasury bills; and the completion of the audits of all commercial banks. Given that Rwanda's exchange regime is free of restrictions on current account transactions, the authorities notified the Fund on December 9, 1998 of their adoption of the obligations of Article VIII, Sections 2 (a), 3, and 4. At end- December 1998, they will also announce the elimination, as of January 1, 1999, of the 0.4 percent fee on foreign exchange transactions. On regulatory reforms, a new Investment Code in line with the government's commitment under the ESAF-supported program will be enacted before end-February 1999.

Box 2. Rwanda: Actions to Accelerate Structural Reforms in Line with the 1998 Program Targets
	Implementation date
Civil service reform
Carry out a civil service census, including information on qualification, job experience, and current job description1 and produce report	Mid-Dec. 1998 End-Jan. 1999
Public enterprise reform
Complete audit of public telephone company (Rwandatel); and publicize results1	Mid-Dec. 1998 Mid-Jan. 1999
Complete report on settlement of cross debts between government and identified public enterprises and decide on settlement2	End-February 1999
Exchange regulations
Issue revised exchange regulations which aim at further liberalizing and simplifying the exchange system; and publicize revised exchange regulations, including the new instruction on the functioning of foreign currency accounts	End-Dec. 1998 End-February 1999
In consultation with Fund staff, notify the Fund of the government's intention to adopt Article VIII status (current account convertibility); announce the elimination of the 0.4 percent fee on foreign exchange transactions as of January 1, 1999	Mid-Dec. 1998
Strengthen supervision of banks' net foreign open positions (including through the revision of the existing instruction)	End-March 1999
Financial sector reform
Undertake pilot issuance of treasury bills, including through conversion of existing government consolidated debt to commercial banks	Before end-Dec. 1998
Submit the draft banking law to parliament1	End-Nov. 1998
Complete audits for all commercial banks; and complete final reports
End-Dec. 1998 End-March 1999
Transfer all eligible government bank accounts from commercial banks to the NBR	End-March 1999
Regulatory framework
Enact and implement the Investment Code in line with the government's commitments in its MEFP of June 4, 1998, including subjecting local purchases of inputs by investors under the Code to the sales tax, and subjecting imports by investors under the Code (other than under export processing zones) to the normal import duty and sales tax, with an appropriate input credit mechanism for domestic sales and a drawback system for exports3	February 1999
Implement an import duty and sales tax drawback system for exports	January 1999
1Prior action for completion of the midterm review. 2Identified enterprises include Electrogaz and Rwandatel. 3 The provisions in the Investment Code relevant to the sales tax will be revised, as necessary, with the introduction of the VAT law.

16. Despite its tight financial situation, reflecting in part delays in donor disbursements, the government has remained current on its debt obligations to the AfDB, World Bank, and the International Fund for Agricultural Development (IFAD), and expects to conclude agreements on regularizing its arrears vis-à-vis other multilaterals before year-end. Following the Paris Club agreement in late July 1998, the government concluded bilateral agreements (on Naples terms) with four Paris Club creditors and is discussing such agreements with the other two Paris Club creditors. It has also approached all non-Paris Club bilateral creditors to obtain at least comparable rescheduling terms. Based on the government's fiscal objectives (in line with the program for end-December 1998) and taking into account external financing already obtained, the residual financing need for the remainder of 1998 is about RF 3 billion (equivalent to about US$10 million). This gap is expected to be largely covered by disbursements of already pledged bilateral budgetary support and, for any remainder, by government use of bank credit within the program limits (adjusted for shortfalls in donor financing as envisaged under the program). Any such use of bank credit will be repaid from expected donor disbursements in early 1999.
III. Policies for 1999
17. The objective of the government for 1999 is to consolidate progress made over the past three years in macroeconomic stability and structural reforms. Accordingly, the authorities are committed to achieving the medium-term objectives of the program as spelled out in our policy framework paper of June 1998. Fiscal policies in 1999 will aim at improving the primary fiscal balance while increasing the allocation of resources to the social sectors. These policies will be accompanied by reforms in the areas of taxation, expenditure and treasury management, civil service, public enterprises, and the external sector.
A. Budget for 1999
18. The 1999 budget is broadly in line with the original program targets, with the primary fiscal accounts projected to be almost in balance (improving from a deficit of RF 1.4 billion originally targeted for 1998). On the revenue side, the budget proposes several measures aimed at offsetting the impact of the envisaged tariff reduction under the Cross-Border Initiative (CBI) and the elimination of the coffee tax. The net impact of these measures is estimated at RF 5 billion, or 0.7 percent of GDP (Box 3). Total revenue is projected at RF 80.3 billion (10.8 percent of GDP); this target is somewhat lower than originally envisaged reflecting the faster trade reform (i.e., reduction of tariff rates on capital and intermediate goods to zero and 5 percent, respectively, and the elimination of the coffee export tax).
19. In line with these objectives, the authorities will implement several measures aimed at improving tax and customs administration as well as tax compliance. To encourage tax compliance, a late payment penalty of 10 percent of income tax due will be introduced. Moreover, the following steps will be taken from January 1999 to ensure that the loss of revenue from the tariff reform is minimized: (i) petroleum imports will be subjected to preshipment inspection by the Société Générale de Surveillance (SGS), as it is currently the rule for all other imports equivalent to US$5,000 and higher; (ii) an advance import tax payment will be required for petroleum imports to avoid tax evasion; (iii) a transparent and flexible pricing mechanism for petroleum products will be introduced; and (iv) exemptions will be curtailed, control of transit trade will be further strengthened, and imports outside the preshipment inspection mechanism will be assessed based as much as possible on invoice prices, verified through periodically updated reference prices from SGS. These measures will be accompanied by the strengthening of the staffing and the computerization of the RRA, with technical assistance from the DFID. Regarding the VAT, the government will prepare a VAT law, with technical assistance from the Fund, for submission to parliament by mid-1999.

    Box 3. Rwanda: Measures Under the 1999 Budget
    	Estimated revenue impact (in billions of Rwanda francs)	Implementation date
    Revenue measures
    Reduce tariffs in line with the objectives under the Cross-Border Initiative, with a rate structure of 25-15-5 percent 1	-/- 4.5	Jan. 1999
    Improve customs administration through use of preshipment inspection for 60 percent of imports, including all petroleum imports; apply system of tax credits for imports by NGOs/diplomats and public investment-related imports	1.5	Jan. 1999
    Increase excise taxes on: petroleum products, except kerosene and lubricants (from 25 to 60 percent)2 beer (from 60 to 80 percent) soft drinks (from 35 to 60 percent) cigarettes (from 60 to 80 percent) wine and liquor (from 60 to 90 percent)	8.0 3.8 2.5 1.1 0.6 0.1
    Jan. 1999
    Introduce a transparent, flexible pricing mechanism for petroleum products, so that retail prices fluctuate with world petroleum prices in RF, while protecting tax revenue		June 1999
    Implement income tax withholding from payments by the government to its suppliers of goods and services (with a credit for the income tax due)	0.7	Jan. 1999
    Make the presumptive income tax on turnover for small and medium-sized enterprises3 obligatory for enterprises with annual turnover below RF 36 million, while leaving the option of the turnover tax and the regular income tax regime available for enterprises with turnover above RF 36 million and below RF 60 million. Introduce the same regime for corporate enterprises	0.7	Jan. 1999
    Eliminate the coffee export tax	-/- 2.0	Jan. 1999
    Transfer the collection of real estate tax to the communal level and of rental income tax to the prefecture of Kigali, with retention of 20 percent of tax proceeds by the prefecture	0.3	Jan. 1999
    Collect dividends from identified public enterprises and private enterprises in which the government has shares4	0.5	1999
    Estimated total revenue impact	5.1 (0.7 percent of GDP)
    Expenditure policies
    Contain military expenditure within 3.8 percent of GDP, i.e., a reduction of 0.4 percent vis-à-vis the estimated outcome for 1998		1999
    Increase significantly expenditure on social services, from 2.6 percent of GDP estimated for 1998 to 3.4 percent of GDP in 1999		1999
    Reduce significantly expenditure on fuel and maintenance of government vehicles and maintenance of government houses, including through the sale of half (500) of all government cars by end-January 1999 and the progressive sale of all government houses occupied by civil servants during 1999-March 2001		1999-2001
    Within a wage bill of 4.8 percent of GDP, improve incentive structure for civil servants		Jan. 1999
    Eliminate existing fringe benefits for civil servants, i.e., car and fuel allowances from January 1999, and housing benefits in kind in the course of 1999- March 2001 with deduction of an appropriate rental value from the salary of civil servants once the new pay structure is in place (until the house is sold)		1999
    1A structural benchmark under the program for 1998-99. A zero tariff rate for capital goods has been in place since mid-1998. 2The revenue impact is net of the loss in excises owing to the lower import tariff. 3 Effective January 1999, the presumptive tax rate is 2 percent (reduced from 4 percent in 1998). 4Identified enterprises include Rwandatel, Electrogaz, Ocirthé, BACAR, Banque de Kigali, and Bralirwa.

20. On the expenditure side, primary expenditure (excluding exceptional social expenditure) during 1999 will be limited to RF 80.5 billion (10.8 percent of GDP). The wage bill will be contained at 4.8 percent of GDP. In line with the policy of retaining and attracting qualified civil servants, the authorities will provide a substantial, differentiated wage increase on January 1, 1999 (including the statutory 3 percent and 5 percent as premium for the newly introduced health insurance for all civil servants, as well as the monetization of fringe benefits); with the implementation of a new functional organization and a job classification of the civil service in the first half of 1999, a new civil service pay structure will be adopted by July 1999. Expenditure on goods and services and domestically financed capital projects are projected at about RF 33 billion (an estimated increase of almost 20 percent vis-à-vis 1998), with increased emphasis on priority sectors. In view of the sale to civil servants of government cars by end-January 1999 and the initiation of the sale of government houses in early 1999, outlays on fuel and maintenance costs for cars and houses will be substantially reduced.
21. Regarding social sector spending, the budget provides for a strong increase in the health and education sectors, based on the initial results of the SSER. Despite these efforts, allocations for these sectors would remain below the original program targets and would need to be revised contingent on the availability of additional external budgetary support on a sustainable basis. The SSER, when finalized, will provide the basis for seeking additional donor support in early 1999. Spending on tertiary education in 1999 is budgeted to increase significantly (and faster than that for primary and secondary education) in view of the urgent need to rehabilitate several institutions (including for teacher and nurse training) and provide scholarships for training abroad. However, the government envisages that, after the rehabilitation in 1999, the share of tertiary education in total education spending (projected at one-third in 1999) will decline and the balance will progressively shift toward primary and secondary education from the year 2000. In this context, the government is committed to implementing cost recovery and efficiency-enhancing measures (including reducing food subsidies) in tertiary education. Additional donor resources will be allocated to primary and secondary education and the health sector. The draft SSER will be used for developing a medium-term expenditure framework for the social sectors; moreover, appropriate performance indicators will be developed to measure the "output" of social expenditure.
22. The authorities are committed to containing defense outlays in 1999 at RF 28.3 billion, equivalent to 3.8 percent of GDP compared with an estimated 4.2 percent of GDP in 1998. Taking into account the full-year impact of the reintegration during 1998 of 10,000 soldiers of the prewar government (RF 1 billion), as well as the wage savings from the demobilization of 3,600 soldiers at end-1998,¹ defense spending will remain constant in real terms. The authorities are committed to a further reduction in defense expenditure (including through further demobilization in the course of 1999), subject to continued improvements in the security situation in the region and progress toward a diplomatic solution of the conflict in the DRC.
23. To improve the transparency and monitoring of expenditure, the government will commence the development of a system of public accounts and operationalize the Auditor General's office in early 1999. Furthermore, the government will improve the management of the payroll and the control of the size of the civil service; to this effect, the government intends to establish by end-April 1999--with technical assistance from donors--a centralized and computerized database of all civil servants and teachers based on the census.
24. Exceptional social expenditure is projected at RF 9.6 billion (1.3 percent of GDP), comprising programs for victims of genocide and other vulnerable groups (RF 4.7 billion), educational assistance and governance (RF 2.1 billion), demobilization (RF 2.2 billion), and severance payments and retraining for retrenched public sector workers (RF 0.6 billion).² The authorities will accelerate the preparation of these programs and make a concerted effort to seek the required financial support from donors. They will also adequately monitor these programs to ensure that target groups are reached.
25. Externally financed capital expenditure is projected at RF 66 billion (8.9 percent of GDP). While the authorities have made efforts to improve the prioritization, implementation, and monitoring of the public investment program, problems persist, as evidenced by the weak implementation of the 1998 program. In this regard, the central project coordination bureau (CEPEX) will be fully established and the procedures for selecting, implementing, and monitoring will be enhanced. Moreover, the authorities will seek to reach agreements with donors in order to adequately prioritize and monitor the implementation of the public investment program.
B. Civil Service Reform
26. Following the census, the government will implement--with technical assistance from donors--a number of reforms leading to the introduction of a new civil service structure by July 1999 (see Box 4). It will continue its policy of reducing the size of the core civil service (i.e., excluding teachers) below the estimated level at end-1998 (about 11,500) through removal of remaining ghost workers identified in the civil service census and the retrenchment of unqualified staff, while meeting priority needs in the health and justice sectors. Furthermore, fringe benefits for senior civil servants (cars, fuel, and housing) will be abolished as of January 1999, except that those who are currently lodged in government houses will be allowed to remain there until they can secure alternative housing but no later than end-March 2001. In the meantime, adequate rental values will be deducted from their salaries. The authorities have appraised the stock of government houses (about 1,100) occupied by senior civil servants and are committed to selling these houses (by open auctions) progressively during 1999-March 2001. The government has established a housing fund for civil servants (with a budget allocation of RF 0.5 billion in 1999) to assist them with the purchase of houses. The authorities will sell by end-January 1999 about half (500) of the government cars, with the right of first purchase for civil servants. The proceeds of these sales will be deposited in a new account at the NBR and considered as net lending in the fiscal accounts. The government is ensuring maximum transparency in these operations.

 

Box 4. Rwanda: Civil Service Reform in 1999
Complete the census of civil servants and teachers; and produce draft report	Mid-January 1999 End-January 1999
Remove identified ghost workers from the payroll	February 1999
Adopt new job classification and grading system for all staff	End-February 1999
Make decisions on a new functional organization of all ministries	End-April 1999
Convert staff into the new job classification system	End-May 1999
Complete job descriptions for all civil servants	End-June 1999
Implement the new civil service and pay structure	From July 1999
Implement a new central computerized payroll system	From January 1999
Implement central, computerized civil service database, with technical assistance from donors	From end - April 1999

C. Other Reforms
27. In the monetary and exchange area, the coordination mechanism between the treasury and the NBR will be strengthened with regular meetings of the staffs of the NBR and Ministry of Finance. Upon the completion of commercial bank audits at end-1998, the NBR will revise existing restructuring plans or devise new ones in early 1999 and agree with each bank on a timetable to adequately provision for impaired assets. With the submission of the banking law to parliament by end-November 1998 (for promulgation by mid-April 1999), the NBR is speeding up the preparation of the prudential regulations (for banks and nonbank institutions) foreseen under the law, with the objective of issuing the main regulations by end-April 1999.
28. On trade reform, the authorities intend to implement the tariff reduction as envisaged under the CBI from early 1999 onward. They are committed to implement the zero intraregional tariff beginning in January 2000. On privatization, progress in the offer for sale of public enterprises has been faster than originally envisaged. In the period ahead, the authorities remain committed to reaching the privatization targets under the program. They will continue to ensure transparency of the process (including through a wide advertisement of the offers for sale) and accelerate the actual sale (including through the timely preparation of title deeds). Regarding public utilities, the government has commissioned a study on the regulatory framework for the telecommunications sector (to be completed and adopted by mid-1999); based on this framework, it will submit to parliament legislation to abolish the monopoly of Rwandatel and regulate the sector by October 1999. It has also agreed with the World Bank to prepare a plan for splitting, restructuring, and privatizing the components of the electricity, gas, and water company (Electrogaz) (to be adopted by September 1999) and to adopt, by end-September 1999, a law to repeal the monopoly of Electrogaz. The revision of the labor code in line with the government's objective of a more flexible labor market has been completed, and the draft law will be submitted to parliament by mid-February 1999, for adoption by June 1999.
29. The financing gap for 1999 is estimated at about US$150 million, including US$35 million for the regularization of arrears to non-Paris Club creditors (delayed from 1998). This gap is expected to be covered by rescheduling from bilateral creditors (about one-third), the EU, and the World Bank (about one-fourth each), and the remainder by budgetary support from AfDB and bilateral donors.

IV. Performance Targets and Monitoring
30. The government requests that the Fund grant waivers for the nonobservance of the end-September 1998 performance criteria on the net foreign assets of the National Bank of Rwanda and the net repayment of domestic arrears. In order to ensure the attainment of the 1998 program objectives, prompt actions have been taken to: (i) increase government revenue collection; (ii) obtain disbursements of confirmed external budgetary support and pursue a more active exchange rate policy; and (iii) fully implement the expenditure and domestic arrears recording and monitoring system, as well as repay domestic arrears accumulated during 1998 down to a normal float agreed with Fund staff (described in the revised technical memorandum of understanding). These actions will permit the government to reach the original financial program targets for end-December 1998. Meeting these targets, as well as implementing the prior actions set out in the boxes, would be a condition for consideration by the Fund's Executive Board of Rwanda's request for waivers and the completion of the midterm review. In view of the above, and taking into account that the end-September shortfall in net foreign assets of the NBR was largely due to external factors, the government believes that its request for waivers is justified.
31. The quantitative benchmarks and indicators for the end of the program year (end-March 1999) have been somewhat revised, in line with the agreed 1999 budget and the projected phasing of donor disbursements; the timing of the structural benchmarks through end-March 1999 has been maintained (see Tables 1 and 2). The monitoring of program implementation has been strengthened, including through more detailed reporting on government bank accounts, as well as regular reporting of the financial accounts of key public enterprises.
32. The government will closely monitor developments in revenue collection and expenditure (including military expenditure), and will take additional measures in case of revenue shortfalls or unforeseen expenditure overruns. Such measures could involve an increase in domestic taxes and a reduction in lower-priority spending. The fiscal program for 1999 includes a contingency mechanism for additional social spending above the targets in the 1999 budget, to the extent that sustainable external budgetary support is available and taking into account the social spending programs derived from the ongoing SSER. In consultation with Fund and Bank staffs, the primary fiscal balance targets will be reduced by the amount of the agreed upon additional social spending, provided it is fully financed by external budgetary support, with a limit of RF 15 billion for 1999. In this context, the government is committed to strengthening consultations with donors. Furthermore, the government has set quarterly targets for budgetary expenditure on education and health and will closely monitor--in consultation with World Bank staff--the impact of this spending on selected "output" indicators for these sectors.