In October 2022, the International Monetary Fund (IMF) approved $319 million for Rwanda as the first African country and the third in the world to benefit from the Resilience and Sustainability Facility (RSF).
The facility was a three-year arrangement that the IMF launched to help countries tackle long-term challenges, such as climate change.
As the arrangement comes to an end, The New Times’ Business Editor Julius Bizimungu spoke to Gabor Pula, Resident Representative for IMF in Rwanda to discuss lessons learnt, how the facility has enabled Rwanda to embark on reforms that will shape the economy, and how the country can strike a good balance between financing its ambitious economic agenda and managing rising debt levels.
Below are the excerpts:
The RSF under which the IMF approved $319 million for Rwanda in 2022 is coming to an end. What lessons have you learnt?
Rwanda’s early access to the RSF was made possible by the country’s preparedness and already existing climate policies.
For example, at the time of the RSF approval, Rwanda already had a comprehensive climate diagnostic, which identified priority areas for reforms that could be supported by the RSF facility. Such a detailed climate strategy ensured a head-start to RSF reform implementation.
Overall, the Rwandan authorities’ performance under the RSF programme has been exceptionally strong. To demonstrate their unwavering commitment to the RSF-supported climate agenda, the authorities even accelerated the implementation of the originally agreed reform measures.
As a result, Rwanda has now successfully completed all its RSF commitments, six months ahead of the initial timeline (of December 2024). Rwanda is the first and only country among our members that managed to do this, and it highlights Rwanda’s ability to accelerate reforms ahead of schedule.
Close cooperation with development partners has been also key to this success. Climate investments require complex technological and financial considerations, which – due to their novelty – are challenging even in the most advanced economies of the world.
Rwanda has been particularly successful in absorbing external technical expertise provided by its development partners and integrating it with home grown solutions. As a result, Rwanda has managed to develop a unique approach to catalyze climate private financing, which could serve as a blueprint for other developing countries.
This unique approach combines three main components: the advanced infrastructure of Private and Public Climate Investment Facilities (Ireme and Intego) that were established already before the RSF, the transparency frameworks, such as the climate budget tagging, green taxonomy and adoption of international climate reporting standards that were developed in the context of the RSF.
Finally, it includes the use of innovative climate finance instruments, which ensure affordability of climate finance for Rwandan green entrepreneurs by blending concessional resources with market-based funding.
Rwanda has a climate action plan that requires $11 billion through 2030. Do the reforms being undertaken enough to enable Rwanda raise this necessary funding?
Given its limited fiscal space, Rwanda needs to rely on concessional and private climate financing to implement its ambitious climate agenda. Indeed, the overall cost of implementing Rwanda’s Nationally Determined Contributions (NDCs) strategy is estimated at $11 billion, which would imply investments amounting to 7 per cent of GDP each year during the 2020-2030 period.
Given Rwanda’s already elevated debt level, room for public sector borrowing is limited. Domestic efforts to mobilise revenue and improve spending efficiency will help, but they take time. This puts the focus on efforts to mobilise private climate investment.
Rwanda successfully leveraged the RSF and managed to secure an extra EUR 300 million with the help of bilateral and multilateral partners, on top of the RSF’s $319 million contribution.
However, this amount is still only a small portion of the total financing needed to implement Rwanda’s climate agenda. In this context, Rwanda must continue its efforts to mobilise concessional and private climate resources.
The IMF has said that Rwanda needs to accelerate the development of green projects and lending operations. What are these projects and why is it important to accelerate them?
The RSF-supported reform measures helped address impediments to concessional and private climate flows to Rwanda. Private climate inflows to Rwanda, similar to other low-income countries, have been constrained by low risk-adjusted returns, persisting information asymmetries, and market size disadvantage.
To overcome these obstacles and establish incentives for private capital, Rwanda needs strong legal frameworks, governance and data disclosure standards guiding its climate investments.
As an example, Rwanda’s new climate budget tagging system and green taxonomy will strengthen investor confidence by mitigating their concerns about greenwashing.
In the next step, these newly developed taxonomies will be used to identify private and public investment projects that can strengthen the economy’s resilience to climate shocks.
Rwanda is also a pioneer in this area among developing economies. Ireme Invest has started its lending operations with a total value of its green projects pipeline estimated at about $30 million over the 2024-25 period.
The scaling up of the pipeline is challenging, as both the Rwanda Development Bank and businesses need time to strengthen their understanding of the technical requirements for climate investments. To address this obstacle, Ireme Invest has established a Project Preparation Facility managed by the Rwanda Green Fund (FONERWA).
Rwanda’s Public Green Investment Facility (Intego) has also identified public investment projects at the total value of $34 million. A well-developed project pipeline should play a critical role in mobilising additional resources to finance Rwanda’s ambitious climate agenda.
The IMF has a 3-year Policy Coordination Instrument that ends next year. The aim was to support the government to build on the progress in macroeconomic, fiscal, and financial reforms. Have any of these reforms happened?
Under the Policy Coordination Instrument (PCI), the Rwandan authorities put together a medium-term reform plan for the 2022-25 period to ensure macroeconomic stability, advance fiscal consolidation, strengthen monetary policy transmission and deepen financial markets, and build socioeconomic resilience. The PCI is a non-disbursing arrangement, which means that the IMF does not provide financial support related to the programme.
We support the authorities in the design of their reform plan, provide technical assistance to build institutional capacity, monitor the implementation of the reforms and report on their progress.
The benefit of such a non-disbursing arrangement for the authorities is what we call the IMF’s "seal of approval” of their policies. It provides assurances for development partners and financial markets that Rwanda’s macroeconomic policies are sound.
Rwanda’s performance under the PCI has been broadly strong.
Key achievements under the PCI include the introduction of more efficient and transparent frameworks to manage public investments, formulation of a medium-term spending rationalisation strategy, gradual deepening of the interbank and foreign exchange market to strengthen monetary policy transmission and the launching of the dynamic social registry, which is a state-of-the-art system that will allow for better targeting of social protection benefits.
In December 2023, the authorities also requested a 14-month financing arrangement under the so-called Stand-by Credit Facility (SCF) to help them preserve foreign exchange reserves, which came under pressure following an increase in the import bill, due to high food imports and the reconstruction after the devastating floods last year.
As a result of the recalibration of macroeconomic policies, the $260 million total financing under the SCF, and its catalytic effect that allowed Rwanda to secure additional concessional financing mainly from the World Bank, foreign exchange reserves have now stabilised at comfortable levels.
The IMF has previously indicated that Rwanda faces fiscal risks from state-owned enterprises. What are these risks and how can they be mitigated?
Besides raising more revenues, fiscal consolidation can be achieved via more efficient spending. Rwanda has limited resources, and it is critical that those limited resources are not wasted and put in the most productive use possible.
Enhanced transparency is key to scrutinise the use of resources, and so it is an important achievement that the Ministry of Finance started to publish the list of major public projects and their selection criteria on its website.
In a similar vein, state-owned enterprises (SOEs) need to be managed efficiently. This means several considerations. First, the authorities need to revisit which SOEs are critical for the functioning of the economy, and which are the SOEs that could possibly be replaced by the private sector.
Second, the corporate governance of remaining SOEs needs to be improved.
Finally, it is important that any financial support provided by the budget to SOEs, in the form of direct subsidies and guaranteed loans for example, are fully accounted for. At the end of the day, the authorities will need to ensure that budget resources are not subsidising loss-making activities in SOEs.
What about the forex exchange market, has Rwanda made reform progress?
With regard to the exchange rate, the central bank did a good job so far in managing pressures on its FX reserves. The exchange rate was allowed to depreciate since early 2023, which was necessary to facilitate the much-needed external adjustment.
Similar to most developing countries, Rwanda’s imports exceed its exports, which implies that the demand for foreign currency is larger than its supply. The trade deficit puts the exchange rate under pressure, unless it is fully financed by capital inflows, such as remittances, foreign direct investment, or concessional borrowing.
Continued exchange rate flexibility will be critical to help absorb external shocks and support the current account adjustment.