Rwanda President, Paul Kagame
An International Monetary Fund (IMF) mission, led by Haimanot Teferra, held virtual meetings with the Rwandan authorities during October 18 – November 15, 2021, to consult under the Article IV and discuss the fifth review of the PCI. At the conclusion of the mission, Ms. Teferra issued the following statement:
Recent Developments and Outlook
1 . A targeted and accelerated vaccine rollout has helped in keeping infections low. With 21 percent of population fully vaccinated as of November 15 (mostly since July), Rwanda’s vaccination campaign aims at raising this ratio to 60 percent by end-2022. In Rwanda’s capital, Kigali, almost 90 percent of adult population is already fully vaccinated.
2 . Growth is projected to rebound very strongly to 10.2 percent in 2021. Economic activity contracted by 3.4 percent last year, with a sizable impact on the service sector. Poverty and unemployment, especially among women, also rose, undoing some of the progress in recent years. The economy is projected to rebound strongly in 2021, helped by sustained fiscal stimulus and an accelerated vaccination rollout. As a result, the output gap is expected to be closed by early next year. Headline inflation stood at 0.6 percent, year-on-year, as of October 2021, largely reflecting lower food prices due to positive weather shocks and lower administered transport prices. However, as these effects fade, inflation is expected to rise to 5.7 percent in 2022, reflecting higher aggregate demand and commodity prices.
3 . The current account deficit is projected to remain large in 2021 at 11 percent of GDP. This is driven by a pickup in imports as economic activities resume. While FDI inflows remained subdued as some large investment projects are delayed, gross international reserves stood at 5.5 months of prospective imports at end-September bolstered by the recent SDR allocation. Over the medium term, the external position is expected to improve through increases in domestic savings, particularly the envisaged fiscal consolidation and productivity growth supported by ongoing structural reforms.
4 . Significant downside risks remain while pandemic scars could hamper longer-term growth. New COVID-19 variants or vaccination delays present downside risks, which would undermine confidence and the nascent recovery. With limited policy space, a more protracted pandemic would lead to difficult trade-offs, worsening the fiscal and debt outlook, stressing the external position, and leaving scars through its impact on human capital accumulation and longer-term growth.
5 . Fiscal policy is reoriented to be supportive of the nascent recovery. The fiscal deficit is anticipated to increase to 9.1 percent of GDP in fiscal year 2021–22 (from 8.6 percent of GDP in 2020–21), partly reflecting additional spending related to mitigating the pandemic impact using part of the 2021 SDR allocation and measures such as temporary tax incentives for manufacturing and construction under the Manufacture and Build to Recover Program (MBRP) to fast-track the recovery.
6 . As the recovery progresses, the focus should shift towards a growth-friendly fiscal consolidation to safeguard the sustainability of public finances and debt. As a result of the extraordinary policy measures to address the COVID-19 impact, public debt is projected to rise to 75 percent of GDP in 2021. While Rwanda’s risk of debt distress is expected to remain moderate, risks have heightened. This calls for fiscal consolidation efforts to start in earnest buttressed by the phasing-off of recently introduced measures (the reduction in fuel levy and tax exemptions) along with credible domestic revenue mobilization and spending rationalization measures. Rwanda’s Medium-Term Revenue Strategy, aiming to raise revenue by 1 percent of GDP by 2023–24 should be launched by end-year, supported by the adoption of tax administration and policy measures. Still, the authorities should protect social programs and sustain human capital investments to address social challenges and limit pandemic scars. To this end, financial resources which became available due to SDR allocation should be targeted to foster inclusive and resilient long-term growth.
7. Fiscal risks should continue to be closely monitored and mitigated. This will require timely, transparent and comprehensive reports of the performance of public-private partnerships and state-owned enterprises and the adoption of remedial actions recommended by the Fiscal Risk Committee. Contingent measures should be reinforced to account for the impact of any unanticipated worsening of the pandemic.
Monetary and Financial Sector Policies
8 . Rwanda’s monetary policy should remain data-dependent, guided by inflation expectations, and supportive of the economic recovery. With economic activity rebounding and rising commodity prices, headline inflation is projected to rise towards the target, which supports maintaining the current monetary policy stance. The authorities should closely monitor developments to inform the need for adjustment of the policy interest rate in line with the inflation outlook to ensure that monetary policy supports the recovery and to further entrench the interest-rate-based framework. Exchange rate flexibility is essential for strengthening the monetary policy framework.
9 . The banking system continues to be stable, liquid, and well-capitalized. The authorities should monitor any buildup of credit risk arising from recently expired forbearance measures. Identifying effective ways to deal with hard-hit sectors together with targeted support remains important. Although non-performing loans remain low largely due to policy support and forbearance measures, the authorities should continue with intensive monitoring of credit risk and prudent loan classification and provisioning.
10 . Sustaining the structural reform agenda is vital for minimizing the scars from the pandemic and to foster a more durable, inclusive, and resilient growth. Initiatives to attract private financing to address rising post-pandemic development needs will need to be stepped up and social programs protected. Special attention needs to be given to early childhood healthcare and development, retraining, support for self-employment and micro-entrepreneurs, especially among women, and narrowing the digital gap. These reforms will be crucial to mitigate long-term individual earnings losses and reduce damages to aggregate productivity and gender inequities brought by the pandemic. Measures to deepen financial markets, sustain the expansion of digital payments, and further financial inclusion will help mobilize domestic savings. A green budget statement planned for next year, along with public financial management reforms to better track environmental and climate spending, will further support the implementation of Rwanda’s Nationally Determined Contributions. Put together this reform agenda will lead to a more durable, inclusive, and resilient growth.