Press Release No. 99/53

Press Release: IMF Approves Second Annual ESAF Arrangement for Rwanda

November 19, 1999

The International Monetary Fund (IMF) today approved the second-year arrangement for Rwanda under the Enhanced Structural Adjustment Facility (ESAF)¹ in an amount equivalent to SDR 23.8 million (about US$32.77 million) to support the government's economic program. Rwanda's three-year ESAF arrangement was approved on June 24, 1998 (see Press Release 98/24) in an original amount of SDR 71.4 million (about US$98 million), of which SDR 23.8 million (about US$33 million) has been disbursed. Today's decision provides Rwanda with another SDR 23.8 million to be disbursed during the second year, with SDR 9.5 million (about US$13.1 million) available immediately.

"Noting persistent weaknesses in revenue collection, Directors welcomed the progress in firmly establishing the Rwanda Revenue Authority as an important step in strengthening overall revenue performance, while -- in the interest of opening the economy-reducing Rwanda's reliance on trade taxes. They stressed the importance of improving tax and customs administration and accelerating the preparation of the value-added tax. Directors also attached particular importance to achieving the targeted reductions in defense outlays in 1999 and 2000. These efforts would be crucial to create room for the needed further increases in spending in the social sectors and other priority areas.

"Directors stressed the need to enhance governance. They welcomed the steps taken to improve budgetary transparency and control, and encouraged the authorities to make the Auditor General's office operational promptly.

"Directors welcomed progress in structural reforms, which they saw as vital for achieving sustained and robust growth, especially as Rwanda's recovery from the 1994 war now seemed to be almost complete. They encouraged the authorities to proceed promptly with civil service reform, as well as with restructuring the commercial banks, and strengthening the supervisory capacity of the NBR. Directors noted Rwanda's significant progress in trade liberalization in recent years. While regretting that revenue considerations had recently led the authorities to introduce temporary import surcharges, Directors welcomed the authorities' intention to phase them out in the course of 2000.

"Noting Rwanda's heavy debt burden, Directors looked forward to considering its request for debt relief under the enhanced HIPC Initiative in the course of 2000, following satisfactory performance under the second-year ESAF arrangement," Sugisaki said.

ANNEX

Program Summary

Rwandese authorities made significant progress in the implementation of macroeconomic policies and structural reforms under the first annual ESAF arrangement. The outcomes for real GDP growth and inflation have been better than foreseen, helped by improvements in the security situation, the return and settlement of refugees, and favorable weather. In 1999, mainly because of problems in the transport and manufacturing sectors, real GDP growth slowed down and is now projected at 5%. The impact of the conflict in the Democratic Republic of the Congo on the Rwandese economy and on the government's capacity to implement economic reforms has been limited.

The government's medium-term strategy aims at achieving high and sustainable growth and rapid poverty reduction. The macroeconomic objectives of the 1999-2002 period are to achieve annual real GDP growth of 6%, while keeping inflation at or below 3% a year. As output is estimated to recover to its prewar level in the course of 1999, sustained growth from 2000 onward is predicated on a further recovery in private investment and savings in response to structural reforms, a further improvement in confidence, and significant levels of government investment focused on improving human capital and rural infrastructure. To finance the required investment while gradually reducing the reliance on humanitarian aid flows and achieving a sustainable debt position over the medium term, national savings are projected to increase by almost 4 percentage points of GDP during 1999-2002.

Under the second-year program, straddling the 1999 and 2000 budgets, improving tax administration and the implementation capacity for social spending will be at the center of fiscal policies. For the year 2000, revenues are projected to improve to 10.7% of GDP. Achieving this target while further liberalizing the trade regime will require considerable efforts on the part of Rwanda to enhance tax and customs administration, including through preshipment inspection of imports, the control of transit trade and smuggling, and accelerated computerization. The major new tax measure foreseen for 2000 is the introduction of a value-added tax, beginning with the coverage of large and medium-sized enterprises from mid-2000 onward.

Social Policies

During the last five years, output, which had dropped by 50% in 1994, has recovered to its prewar level. Nevertheless, the majority of the population is still worse off today, as many displaced people still live in temporary shelter, and poverty incidence (estimated at 70%) is higher than in the prewar period.

To make further progress on its social objectives, the government envisages significant increases in budget allocations to these sectors over the coming years, with particular emphasis on the training of health workers and teachers, the provision of books, medicines, and other essential supplies, and the establishment of adequate financial mechanisms to promote efficiency at the local levels.

In addition to this, the government will be implementing a strategy to reduce poverty, focusing on improving agricultural productivity, promoting small and medium-size enterprises in both rural and urban areas, and encouraging the expansion of the coffee and tea sectors through liberalization and privatization.

Rwanda joined the IMF on September 30, 1963; its quota² is SDR 80.1 million (about US$110.3 million). Its outstanding use of IMF financing currently totals SDR 45.8 million (about US$63 million).