Abstract
Staff Report for 2019 Article IV Consultation and a Request for a Three-Year Policy Coordination Instrument-Press Release; Staff Report; and Statement by the Executive Director for Rwanda
Our Rwandan authorities would like to express their gratitude to Staff, Management and the Executive Board for the Fund’s continued support to their policy and reform agenda. They value the close cooperation with the Fund and appreciate the constructive discussions held with staff in Kigali in the context of the 2019 Article IV Consultation and the negotiations for the Policy Coordination Instrument (PCI).
Amid a challenging environment and exposure to exogenous shocks, Rwanda’s economic performance continues to be strong thanks to the authorities’ commitment to reforms and ownership of their development agenda. Growth has been sustained and inclusive over the past years, economic transformation is taking hold and important inroads have been made in poverty reduction. The significant economic and social gains of the last decade have been achieved with the IMF support.
Looking ahead, the authorities are strongly committed to transforming Rwanda into an upper middle-income economy by 2035. To achieve this objective, they will implement their National Strategy for Transformation (NST). The first plan of this kind, NST1, spans over the 2017–24 period and emphasizes the main three pillars of economic transformation, social transformation and transformational governance.
It is in this context that the Rwandan authorities request a successor program supported by a PCI. They broadly agree with staff analysis on the recent developments, outlook and risks as well as policy priorities to sustain the implementation of their economic transformation agenda. The PCI is intended to support progress towards the NST1 objectives, including by helping to preserve fiscal discipline, improve domestic revenue mobilization and maintain debt sustainability.
Recent Developments and Outlook
Real GDP growth accelerated to 8.6 percent in 2018, exceeding projections, mainly driven by activity in construction, manufacturing and trade and transport services. Inflation stood at 1.4 percent on average in 2018, well below the authorities’ medium-term target of 5 percent. It fell further to 0.2 percent y-o-y in April 2019. It is against this background that the National Bank of Rwanda (NBR) lowered its policy rate from 5.5 percent to 5.0 percent last May. The fiscal position in 2018, with an overall deficit of 4.7 percent of GDP, was broadly similar to the previous year and in line with expectations. The current account deficit of 7.9 percent of GDP was broadly unchanged from 2017. Gross international reserves improved slightly from 4.5 to 4.6 months of prospective imports.
The medium-term outlook remains favorable. Growth is projected to stand around 8 percent over the medium-term while inflation is expected to be within the target band. The current account deficit would rise to 9.6 percent in 2019 and decline thereafter, reflecting frontloaded public investment spending, consistent with meeting NST1 targets. Its financing will continue to rely on private direct investment and bilateral and multilateral infrastructure project loans. The authorities will further enhance economic resilience and build up buffers to mitigate the effects of downside risks, notably lower-than-projected official development assistance (ODA), adverse commodity price shocks and difficult weather conditions—if they came to materialize.
Macroeconomic Policies and Reforms for 2019 and the Medium Term
Building on the progress achieved thus far, the Rwandan authorities will pursue sound and supportive macroeconomic policies and implement key reforms for 2019 and the medium term. In this regard, they have adopted new fiscal and monetary policy frameworks and put in place an ambitious reform agenda to strengthen public financial management (PFM), foster financial sector development, and buttress private sector development. They are committed to keeping the reform momentum for addressing the economy’s remaining challenges while making further steps in implementing their National Strategy for Transformation.
Fiscal Policy and Reforms
The authorities’ fiscal policy will be geared towards promoting higher and inclusive growth while ensuring fiscal and debt sustainability. In this respect, they will strive to maintain the public debt-to-GDP ratio in present value below 50 percent over the medium term and to preserve the country’s low risk of debt distress. Fiscal policy beginning FY 2019/20 onwards will target an overall fiscal deficit of no more than 5.5 percent of GDP on a five-year rolling basis. This will create fiscal space to contribute to the financing of the NST1.
The authorities fully understand the criticality of boosting domestic revenue to support their transformation agenda. They will make steps to raise domestic revenue on average by 0.2 percentage point of GDP annually over the medium term starting in FY 2020/21. In this regard, they are committed to refining their tax expenditure framework including for streamlining tax exemptions and improving tax compliance. They are also taking measures to further strengthen tax administration, such as leveraging various digital technologies to reinforce risk-based audits and enhance VAT refunds.
Public financial management will be further reinforced with reforms that are being implemented to enhance fiscal transparency and public investment management. Going forward, the authorities are committed to further reduce fiscal risks and improve transparency including by moving to the GFSM 2014 fiscal reporting framework and developing internal capacity to start conducting fiscal risk analyses, with the technical assistance of the Fund.
Monetary and Exchange Rate Policies
The NBR has transitioned to the new interest rate-based monetary policy framework. The latter is supplemented by new infrastructure and efforts to bolster liquidity management, enhance communication and deepen money and financial markets. The central bank will strive to keep inflation within the target band going forward to prevent the entrenchment of low inflation expectations. Moreover, measures have been introduced to develop the interbank markets and to supplement the NBR’s forecasting capacity and market expectation surveys.
The authorities will maintain their flexible exchange rate regime as the first line of defense against external shocks. They will also continue supplying foreign exchange to the market to satisfy demand reflecting mostly the execution of infrastructure projects, while considering the implications for financial sector and price stability. The current level of gross international reserves at 4.5 months of prospective imports is comfortable for precautionary purposes.
Financial Sector Policies
The financial sector remains sound and stable, with adequate liquidity, profitability and capitalization. The financial regulatory and supervisory frameworks are broadly aligned with international standards. Updated standards on disclosure and regulatory reporting have been implemented. The authorities will endeavor to further strengthen the AML/CFT framework along the lines recommended by an IMF technical assistance mission. In this regard, they have developed several offsite and onsite AML/CFT supervisory tools which will be strengthened based on a new law adopted in August 2018. They also continue to collect data on institutions presenting money laundering/terrorist financing risks.
Structural Reforms
The authorities are committed to advancing economic diversification and structural transformation to realize growth potential. They will strive to lift related impediments to promote a private sector-led, job-rich and inclusive growth at the core of their NTS1. Continuous progress in improving the business environment is of paramount importance in this strategy. Remarkable achievements have been made in the past decade on this front. Indeed, the World Bank’s 2019 Doing Business report ranks Rwanda among the top-10 performers worldwide, with the 29th position out of 190 countries globally and 2nd position in Africa. To further improve the business climate, the authorities are stepping up efforts to bring down the costs of financing, energy and transportation.
As well, the authorities are determined to strengthen competitiveness, increase efficiency in the delivery of public and private services, advance human capital and gender equality, reform the labor market and promote regional integration. The recent coming into force of the Continental Free Trade Area (CFTA) will contribute to the authorities’ effort to boost trade and spur broad-based growth. They will also leverage their participation in the G-20 Compact with Africa initiative and are calling on development partners to avail “blended finance”.
Conclusion
The Rwandan authorities have achieved impressive results in strengthening macroeconomic stability and reforming the economy over the past decade. They recognize the challenges still lying ahead notably in terms of further improving domestic revenue mobilization and creating the fiscal space to meet their economic transformation ambitions. The authorities are committed to continue to implement their policies and reforms to boost long-term inclusive growth while sustaining macroeconomic stability. The authorities are confident that a PCI would help reach these objectives, including as a signaling tool and by catalyzing partners’ support. Our authorities request the Executive Board support for a PCI.