IMF backs Rwanda domestic funding approach

Rwanda should continue mobilising resources from domestic sources and widen her taxable base as a way of reducing dependency on foreign aid and ensuring sustainable growth, the International Monetary Fund (IMF) has said. This was in a statement released, early this week, after the Fund’s executive board of directors completed a review of Rwanda’s Policy Support Instrument (PSI). PSI is designed for low-income countries such as Rwanda that may not need financial assistance from IMF but still seek the Fund’s advice, monitoring, and endorsement of their policy frameworks. Rwanda’s current PSI which runs for three years until 2016 was approved by the IMF board in December last year. In its first year of implementation, IMF commended Rwanda for successfully implementating the country’s economic programme against a ‘challenging economic environment.’ “Strengthening the domestic revenue base helps reduce aid dependency, and the authorities should vigorously pursue improvements in revenue administration and tax policy improvements in agriculture, and mining,” said the Fund’s directors in a statement. Rwanda’s fiscal deficits, (which occurs when government’s total expenditures exceeds its revenue), IMF projects, will, in the medium term decline given its recourse to domestic financing. In a bid to strengthen Rwanda’s debt management capacity and project implementation, government established a debt management unit at the Ministry of Finance which the IMF hailed as an important tool for prudent public spending. “The available room to fund new infrastructure projects and maintain a low risk of debt distress is limited and sensitive to changing economic circumstances. This requires consistent and prudent debt management, through exploring all available concessional financing options, private sector involvement and judicious use of non-concessional borrowing,” advised the directors. Treasury bonds Rwanda has recently started issuing treasury bonds which have positively been received on the local stock market hence enabling government to mobilise more revenues domestically. Last month, government issued Rwf15 billion bond with a seven-year maturity period after which holders will cash in at an attractive annual interest rate of 12.47 per cent; the bond was oversubscribed by 187 per cent with demand from mainly local investors. According to the Ministry of Finance and Economic Planning, the excellent performance of its bonds can be attributed to the growing awareness about investing in the government’s debt and trading on the Rwanda Stock Exchange (RSE). Celestin Rwabukumba, the chief executive of the RSE said the growing appetite for bonds is evidence that Rwanda’s debt market is now ‘up and running.’ With an assured local market for government debt, it’s clear why IMF has confidence that Rwanda’s fiscal deficit in the medium term will ease. Caution However, the statement also provided some caution to the government pointing out areas where more efforts are needed to safeguard current gains and ensure sustainable growth. For instance, the directors’ statement urged government to expedite the removal of remaining structural impediments to private sector investment so as to foster greater regional integration and export diversification. “Efforts are needed to strengthen the business environment, including by lowering business costs and reducing remaining trade barriers,” read the statement in part. In order to strengthen fiscal sustainability and reduce foreign aid dependency, IMF urged Rwanda to not only improve tax administration but also broaden the tax base with the Fund pledging technical assistance to develop tax policy measures in agriculture, and mining. Due to recent disruptions in donor aid to Rwanda, government’s decision to identify specific contingent cuts for FY2014/15 was applauded by IMF directors who noted that the move helped safeguard priority social spending, in the event of revenue shortfalls. They also encouraged ongoing efforts to strengthen public financial management. Although the directors found Rwanda’s monetary policy stance appropriate in view of rising inflationary pressures, they encouraged the authorities to improve the effectiveness of the monetary transmission mechanism, through the development of deeper financial markets and new monetary instruments. Specifically, the IMF urged Rwanda to implement the Financial Sector Development Plan which would further promote financial deepening and inclusion. Also, while the directors found Rwanda’s real exchange rate broadly in line with economic fundamentals, they underscored the need to maintain exchange rate flexibility to reduce external imbalances and preserve foreign exchange buffers. The Minister for Finance, Claver Gatete, said: “We appreciate the board’s endorsement of our programme. Widening the tax base and informal sector inclusion in order to increase our domestic resources has always been our policy.” “The successful review shows the confidence in the country’s economic management and our leadership.”

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IMF backs Rwanda domestic funding approach