Briefing note on the 2009/10 budget

1. Context The Rwanda Government signed the Treaty of Accession to the East African Community (EAC) on 18th June 2007 and one of the requirements of the treaty was to align our budget calendar to that of the Community with effect from July 1, 2009. The reading of the 2009/10 budget before the Parliament by the Hon Minister of Finance and Economic Planning on Thursday 11, 2009 is a positive step towards this commitment. As agreed in the meeting of Ministers of Finance from the East African Community Member States held in Nairobi on 20th May 2009, all Member States shall present their budgets to their respective legislative Assembly on Thursday 11th June 2009. This is the first budget for the Government of Rwanda that conforms to the EAC budget calendar and shall run from July 1, 2009 to June 30, 2010. Aside from aligning with the EAC budget calendar, the Government of Rwanda committed in the same treaty to start implementing the EAC Common External Tariff with effect from July 1, 2009. This implies that the customs tariff band will change from 4 tariff bands to 3 tariff bands with the highest tariff rate of 25% for finished products, 10% for intermediate goods and 0% for raw materials. 2. Overview of Rwanda’s Recent economic Performance – strong growth Economic performance and growth was impressive in 2008, despite the key challenges in international context like: a) The global financial and economic crisis;b) Fluctuations in oil prices;c) The rise of food prices. The Rwandan Economy has recorded a tremendous performance over 2008, as it experienced its first double-digit real growth rate in over the past five years, at 11.2%. The contributing factors to this strong performance, among many others, are: a) The excellent performance in agriculture (15% growth in food crop production as a result of improvements in the distribution of fertilizers, the use of better quality seeds, planting techniques and land consolidation; b) 10.7% growth in industry sector with improvement in electricity supply as a result of plant refurbishment and investment in a number of micro-hydro facilities, increasing Rwanda’s domestic power generation; c) 7.9% growth in the services sector including financial sector and transport & logistics was facilitated by Government meeting targets to improve investor confidence and the business environment. Owing to strong growth in 2008 with booming business activity, increased commodity prices both for imports and domestically produced goods, fiscal performance exceeded targets by 28%. The Government expenditures were contained within the projected limits to avoid fueling inflationary pressure. Consequently, the projected fiscal deficit reduced by 49% and the Government was able to increase its reserves. On the external front, the trade deficit continued to widen to about 14% of GDP due to increased imports of construction goods and machinery to meet the EDPRS investment needs with slowly rising export receipts. Moreover, prices of imports increased on average by 27.6%. On a positive note however, the volume of imported capital goods increased by 12.8% while the volume of consumer goods decreased by 11% indicating the bias towards investing spending. The year 2008 witnessed growth in excess liquidity that was carried over from the year 2007. Monetary expansion was therefore curtailed and money supply fell by 10% against rates of over 30% that prevailed in the previous years. The impact of reducing the pace of monetary expansion was reflected in falling inflation in the last months of 2008 and this has continued in 2009. Foreign exchange reserves remained satisfactory at 5.6 months of imports at the end of December 2008 and have remained above 4.5 months of imports. The Rwanda Franc remained stable against the US dollar depreciating slightly by about 2% during the year 2008. 3. Current economic environment and the medium term perspectives The main impacts for Rwanda of the current Global Financial and Economic Crisis are expected to be reduced demand for exports such as tea and coffee, reduced income and revenues from tourism and the possibility of reduced aid flows in the medium term as the western Governments reduce their spending. The GoR will continue to invest in the priorities outlined in EDPRS which will provide a solid base for future growth and ensure that Rwanda weathers the global financial storm. The broad expenditure orientation of the Government in the medium term is built on the following foundations: a.The development of physical infrastructure to enable the business environment and reduce the cost of doing business in Rwanda. This will focus on energy generation and distribution, road construction and rehabilitation, and ICT development. Special attention will be put on regional infrastructure projects in transport, energy, ITC and telecommunication. About 190.4 billion have been set provided for this sector in the 2009/10 budget. b.The development of the productive sector with emphasis on the agriculture supply, agri-business, land reform and promotion of value addition for exports. This is line with the recommended measures to mitigate the impact of the global financial crisis. Manufacturing and financial services sectors have also been given priority. The total budget set aside for this sector in the 2009/10 budget is RwF 87.9 bn. c.Human development and social sectors will retain its momentum as recommended by the EDPRS. This budget is supporting activities which aim at improving human health and slowing down population growth. After achieving the significant goal in enrolment, focus is now turned to improving quality of the ‘9 year basic education’, raising the completion rates and strengthening post-basic education. To protect the most vulnerable members of society from the effects of the global economic crisis, the government will accelerate the implementation of the Vision 2020 Umurenge Program (VUP). This sector has been allocated about RwF 270.4 bn in the 2009/10 budget. d. Good governance in Rwanda will be maintained and improved to increase the competitiveness of the Rwandan economy to attract more foreign investment and position the Rwanda’s products for a competitive advantage in the regional and international markets. This will be achieved through strengthening good governance institutions, stepping up skills development and deepening law reforms to create conducive environment for business development. This sector has been allocated about RwF 289.3 billion in the 2009/10 budget. 4. The Budget Proposals for the 2009/10 Financial Year The budget proposals for the year 2009/10 reflect the revenue sources and expenditure allocations for the sectors of the economy but also include the tax policy measures that will accompany the 2009/10 budget. These proposals are described below: 4.1.Revenues and Expenditure Proposals: The Government intends to spend RwF 838 billion in 2009/10, which is equivalent to USD 1,452,843,273. Despite the fact that this budget has been prepared against the backdrop of the global financial crisis, it is 24% higher than the 2008 budget. The share of capital expenditure has increased from last year’s allocation by 33% to RwF 348.1 billion. The recurrent expenditure for the 2009/10 comprises 57% or RwF 474.5 billion, which is 2% less that the allocation of the previous year. Net lending and payment of arrears comprise about 10% of the 2009/10 budget. Emphasis in spending has been placed on financing development projects to create more jobs and to generate growth. Internal resources mainly comprise of tax revenues that account for 86% of internal resources in the 2009/10 budget. Growth in tax revenues has been very impressive and is projected to increase by 34% in the 2009/10 budget. Non Tax Revenues and Other Domestic Financing comprise 8% and 6% respectively of the 2009/10 internal resources. The financing from other domestic resources is reducing in the 2009/10 budget because of deliberate action to cut domestic borrowing by the Government to create more credit for private sector borrowing. External financing of the 2009/10 budget increases by 18% compared to the 2008 budget. External grants increase by 11% compared to the 2008 external grants while external loans increase by 65%. The big increase in external loans is largely due to the increased drawdown of loans to construct the Nyabarongo hydro-power dam and rehabilitation of the Kigali roads. The debt levels for the Government of Rwanda are still in the sustainable limits according to the recently concluded debt sustainability analysis. 4.2. Tax Policy proposals: a. The Rwanda Government signed the Treaty of Accession to the East African Community and according to this treaty the Government of Rwanda will start to implement the EAC Common External Tariff with effect from July 1, 2009. This implies that the customs tariff band will change from 4 tariff bands to 3 bands with the highest tariff rate of 25% for finished products, 10% for intermediate goods and 0% for raw materials and capital equipment. This is compared against the present tariff rates of 30% for finished products, 15% for intermediate goods, 5% for raw materials and 0% for capital equipment. While this shift will lead to revenue loss for the Government in the short term, it will increase the economic welfare of the citizens through more affordable and competitive prices. b. The implementation of the EAC lower tariff rates will lead to a projected revenue loss in the short-term of about 15.9 million Euro or RwF 12.2 billion. However, because of the increased trade arising from lower tariff rates, it is envisaged that gains on domestic taxes will compensate for the loss in customs duties. In the short-term, the revenue loss will be covered through the COMESA compensation fund and Rwanda has already applied for compensation. c. According to article 12,3o of the protocol on the establishment of the East African Community Customs Union and article 14,3o of the Treaty for the Establishment of the East African Community, the council may review the common external tariff structure and approve measures designed to remedy any adverse effects or safeguard community interests. It is in this spirit that the following tax policy measures have been agreed at the East African Community level and have been proposed to accompany the 2009/10 budget: i. Grant exemption of import duty on four wheel drive vehicles specially designed and built for tourist purposes under the exemption regime. This is geared towards promotion of the tourism sector. ii. Grant remission of Common External Tariff (CET) on wheat grain at 0% for Rwanda for a period of one year. This is principally to promote the wheat milling industry in Rwanda iii. Exemption of import duty on industrial spare parts. This is aimed at promoting industrialization in the region. iv. Exemption of duty on equipment and inputs excluding motor vehicles imported by a licensed company for direct and exclusive use in oil, gas or geothermal exploration, and development upon recommendation by a competent authority of a Partner State. This is to facilitate companies engaged in gas exploration and development in Rwanda. v. Exemption of heat insulated milk tanks for dairy industry. This is to promote diary industry in Rwanda. vi. Reduce CET rate for Asbestos fibres from 25% to 0%. vii. Reduce import duty rate for Yarn from 10% to 0%.This is to promote the textile industry in Rwanda. viii.Rwanda to stay application of CET of 75% on rice and apply a duty rate of 30% for a period of two years. Rice is an essential food item in Rwanda and applying CET of 75% would make it very expensive and unaffordable. ix. Review the import duty rate from 25% to 0% on Television cameras, digital cameras and video camera recorders. This is to promote film industry in the region by providing job opportunities to the youth. x. Grant remission of import duty from 25% and apply 10% for trucks of carrying capacity of 5 tonnes and above for one year for Uganda, Tanzania and Rwanda; Grant remission of import duty on trucks of carrying capacity of over 20 tonnes from 25% and apply 0% for Uganda, Tanzania and Rwanda for one year;The remission of import duty for trucks is to reduce the cost of transport of goods given the fact that Rwanda is a landlocked country. xi.The CET for kerosene stove to be reduced from 25% to 10%. This is basically to protect the environment and promote the Jua karis in the region. xii.Ban exportation of Scrap aluminium, steel and copper wires and cables. This decision is to halt the vandalism and uproot of infrastructure like electrical cables which is rampant in the region. d. It has also been decided to increase the excise duty on airtime from 3% to 5% as initially agreed with the players in the sector to progressively adjust upwards the rate rather than a one-off shift in the tax rate. 4.3. Detailed Expenditure allocations: The allocation of expenditure to the following four key clusters of the economy has been done as follows: 4.3.1. INFRASTRUCTURE The total budget allocation in 2009/10 fiscal year to this cluster is RwF 190.5 Bn. This budget is distributed in sectors of transport and communication, water and sanitation, fuel and energy, land housing and community amenities as follows: 4.3.1.1. Transport and Communication The total allocation of this sector is RwF 103.6 Bn. The key activities to be implemented under transport and communication include: • Rehabilitation of national roads like Ruhengeri-Gisenyi; Ngororero-Mukamira, Kigali-Musanze, Musanze-Rubavu, Rusizi-Tyazo, Ntendezi-Kitabi, and Kicukiro-Kirundo; • Finalize studies of the Bugesera International airport and the Isaka-Kigali railway. • Rehabilitation and construction of rural roads through the Rwanda Local Development Support Fund and urban roads through the Transport Development Board. The main roads to be rehabilitated are: Tyazo-Pindura, Cyakabiri-Nyabikenke-Ndusu, Byimana-Buhanda-Kitabi, Kazabe-Rutsiro-Gashubi, Nyamirundi-Bushenge, Maya- Rushaki-Muhambo, Butare-Kibeho-Muse, Mudasomwa-Gisovu, Kibungo-Ramiro, Ngororero-Vunga-Nyakinama, Nyankora-Nasho. 4.3.1.2. Water and Sanitation The total allocation to this sector is RwF 19.1 Bn. The key activities to be implemented under this sector include: • Finalize the rehabilitation works on two water pipes in Kamonyi District (8Km), rehabilitation of 2 water pipes in Nyamasheke District (57km), rehabilitation of the Gahama-Karama-Ngarama water pipe (10km) in Gatsibo, rehabilitation of a water pipe (33 Km) in Nyamagabe District, 4 water pipes in Nyaruguru District(80 km), 6 water pipes in Huye District(35 km); • Finalize the construction works on water pipes: at Musamo (14.2km) in Ruhango District, Rwamagana-Kayonza (31,5Km), Rulindo (8Km), Nyamagabe (58,2Km), Nyaruguru (65Km), Nyabihu (3.5km), Rutsiro (6 km) and Rusizi (3 km); • Water projects feasibility studies: studies of rehabilitation and construction in Gisagara, Huye and Nyaruguru Districts (380km), Study for the rehabilitation of water plants and pipes in towns (Karongi, Nyanza, Rubavu, Muhanga, Ngoma, Rusizi, Gicumbi) and studies for the rehabilitation of 150 water sources in Nyaruguru District; • Under sanitation, plans are there to finalize construction of school latrines in Gisagara (33 latrines), Huye (40 latrines) and Nyaruguru (70 latrines). 4.3.1.3. Fuel and Energy The total allocation to this sector is RwF 62.9 Bn. The key activities to be implemented under this sector include: • Finalize the construction of the Rukarara electrical plant that will generate 9.5 Megawatts; • Finalize the construction of the Nyabarongo electrical plant that will generate 27.5 Megawatts; • Finalize the construction of 8 small electrical plants (Janja, Mukungwa II, Rugezi, Nyirabuhombohombo, Gashashi, Nyabanga, Nshili, Ruhwa) that will generate 6.7 Megawatts; • Continue the construction 6 small electrical plants that will generate 1.5 Megawatts (Mazimeru, Musarara, Kavumu-Mwange, Mpenge I, Murunda, Mpenge II) with the support of Netherlands and the private sector; • Complete the construction of 3 small electrical plants that will generate 2.3 Megawatts (Keya, Nkora, Cyimbili) with the support of BTC; • Finalize the electrification works in the Districts of Gisagara, Kirehe, Ngororero, Nyaruguru and electrical lines Kigali-Kiyumba, Mbarara-Birembo and Rukomo-Munini-Nyagatare; 4.3.1.4. Land housing and community amenities The total allocation to this sector is RwF 4.8 Bn. The key activities to be implemented under this sector include: • Finalize the construction of the former Umutara Province Headquarter; • Complete the construction of the Eastern Province Headquarter; • Complete the resettlements works in the towns of the Western Province; 4.3.2. PRODUCTIVE CAPACITIES The total budget allocation in 2009/10 fiscal year to this cluster is RwF 87.9 Bn. This budget is distributed to sectors of Environmental protection, Agriculture and Industry as well as Commerce as follows: 4.3.2.1. Environmental protection The total allocation to this sector is RwF 13 Bn. The key activities to be implemented under this sector include: • Continue and complete the activities of the protection of the Sebeya and Nyabarongo river banks, the Kivu and Muhazi shores. • Continue with the implementation of the zero plastic policy. 4.3.2.2. Agriculture The total allocation to this sector is RwF 53.9 Bn. The key activities to be implemented under this sector include: • 3920 Hectares of terraces will be developed; • Fishing will be developed with the introduction of 600 000 baby fishes; • Continue the Girinka program and distribute 6375 Ankole cows, and 975 crossed cows; • Marshlands Development on a total area of 2,872 Ha will continue in: Mwesa in Bugesera, Yanze, kibaya-Cyunuzi, Kinnyogo II, Sagatare-Nyamazi-Rwabutazi and Sagatare-Nyamazi-Rwabutazi; • Construction of 3 irrigation facilities in rice plantations (2 in Cyili marshland, 1 in Bugarama marshland); • Under the crops intensification program, 17,400 Tones of fertilizers will be imported and distributed, 1000 exemplary farms will be put in place; • Capacity Development in 80 cooperatives will be done in the fields of agriculture and livestock (use of fertilizers, selected seeds, Integrated Pest Management, crops storage, creation of farmers cooperatives, etc); • 10 million coffee seeds will be multiplied under the coffee development program; • Tea production will increase from 2 126 kg /ha up to 2 400 kg/ha in 2009/10; 100 Ha of damaged farms will be rehabilitated • 3 storage facilities will be put in place and 1 crops market will be constructed. 4.3.2.3. Industry and Commerce The total allocation to this sector is RwF 21.1 Bn. The key activities to be implemented under this sector include: • 4 buyers’ cooperatives will be supported and their capacity will be developed; • A software for petroleum products strategic stocks management will start to be used; • 300 Cooperatives will be inspected; • 850 samples of imported and exported products will be controlled through the Rwanda Bureau of Standards. 4.3.3. HUMAN DEVELOPMENT AND SOCIAL SECTORS The total budget allocation in 2009/10 fiscal year to this cluster is RwF 270.4 Bn. This budget is distributed to sectors of Youth, Culture and Sports, Health, Education and Social Protection as follows: 4.3.3.1. Youth Culture and Sports The total allocation to this sector is RwF 6.2 Bn. The key activities to be implemented under this sector include: • Prepare and participate in international sports competitions; • Increase by 10 the number of COOJAD agencies in districts, fight against youth drug use and complete the rehabilitation of the National Youth Council headquarter; • Prepare for FESPAD 2010; 4.3.3.2. Health The total allocation to this sector is RwF 85.6 Bn. The key activities to be implemented under this sector include: • Under the family planning programme: trainings will be conducted to help people change attitude; • King Faycal Hospital will be rehabilitated and equipped; • 1.300.000 Mosquito nets will be distributed under the malaria control program; • Health Centers that provide voluntary counseling and testing services will be increased from 390 to 450; • Health centers that provide anti retroviral drugs will increase from 243 to 270; • 7346 HIV infected pregnant women will receive anti retroviral drugs to protect their babies; • Put in place the “Itorero for Health” and train health workers at different levels in that Itorero; • Payment on behalf of 514,250 vulnerable people to benefit from “Mutuelle de santé”; • A ministerial order will be issued to regulate “mutuelle de santé” 4.3.3.3. Education The total allocation to this sector is RwF 139 Bn. The key activities to be implemented under this sector include: • Construction of 1703 classrooms in primary and lower level secondary under the nine year education program; • Payment of capitation grant in primary and lower secondary worth RwF 20.3 Bn and School feeding worth RwF 3.8 Bn; • 590,000 textbooks will be bought and distributed to pre-primary, primary, and secondary schools; • 14,000 teachers will be trained on different subjects to be taught at various school levels; • 4 primary schools and 4 secondary schools with disabled students will receive special equipments; • 100.000 «Laptops» will be distributed in primary schools and 210 desktops will be distributed in secondary schools. Also 10 secondary schools will be equipped with solar panels; • 76 secondary schools will have internet connection; • Rehabilitate and expand classrooms in Technical and Vocational Education Training schools like the Kicukiro Polytechnic, distribute specialized equipments, improve the curriculums and provide training to lectures of those technical schools; • Introduce new faculties in Higher Learning Institutions (KHI, KIST, KIE and SFB), these faculties include: Tourism and Hospitality Management, Entrepreneurship and Public Procurement, Architecture and Environment planning, • Introduce Masters programmes at the National University of Rwanda; • Introduce the Distance Learning program to allow existing teachers to acquire higher education levels; 4.3.3.4. Social Protection The total allocation to this sector is RwF 39.5 Bn. The key activities to be implemented under this sector include: • Preparation of master plans for selected 60 sectors under the VUP program; • Increase support to the Genocide Survivors Fund; • Support interventions for repatriation and resettlement of returning refugees. 4.3.4. GOVERNANCE AND SOVEREIGNTY The total budget allocation in 2009/10 fiscal year is RwF 289.2 Bn. This budget mainly is distributed to sectors of General Public Service, Defense and Public Order and Safety as follows: 4.3.4.1. General Public Service The total allocation to this sector is RwF 200.1 Bn. The key activities to be implemented under this sector include: • Continue to support demobilization and reintegration program; • Continue to support Peace Keeping Operations; • Increase support to Local Government entities; • Increase support to public institutions; • Strengthen regional and international cooperation. 4.3.4.2. Defense The total allocation to this sector is RwF 43.6 Bn. The key activity to be implemented under this sector relates to the professionalization of the military workforce to increase their capacity and discipline. 4.3.4.3. Public Order and Safety The total allocation to this sector is RwF 45.6 Bn. The key activities to be implemented under this sector include: • Maintain and strengthen internal security, • Strengthen the judicial system and reduce case backlogs; • Continue to support social rehabilitation interventions through Rwanda Correctional Services. Ends