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       Monday, August 21, 2006

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Analysis: Rwanda Economic Performance and Debt Reduction

By Fidel Munyeshyaka
Researcher
GLCSS

Rwanda has started the process of identifying its strategy for its development and long term investment program, and the Finance Ministry has recently released a half year economic report for the period from January to June 2006 that shows considerable growth in economic performance in 2006 and a good economic outlook from 2007. The report indicates the improvement of real growth domestic product (GDP), inflation, domestic revenues, debt and external trade as well as fiscal sector.

In an interview with the Great Lakes Centre for Strategic Studies (GLCSS), Finance Minister James Musoni stated that the Rwandan economic outlook is good.
“The real GDP growth is likely to reach 5.8 percent by the end of 2006,” he said, “and 6.4 percent by the end of 2007. In addition GDP per capita is US$300 this year while last year GDP per capita was US$ 200.”
He further disclosed that inflation is controlled but serious concerns remain with regard to petroleum. The inflation rate reached 9.4 percent at the end of June against a target of 7.5 percent. However; underlying inflation (without food and energy) is much lower at 3.4 percent.
The performance of external trade has been uneven in the first half of 2006. Imports recorded a good performance with a 17.3 percent growth to the end of June and was geared toward intermediaries, machinery and equipment. Exports also registered an improvement with a 2.8 growth to the end of June 2006. The tea exports grew by 35.4 percent to US$ 17 million, but coffee grew much less at 4.1 percent to US$19 million in the six month period. Musoni also noted that minerals (except wolfram), hides and skin had a weak performance.

Fiscal discipline has strengthened and is likely to remain strong. The mid-year budget revision contains a reduction of 2.2 percent. Early indications show that fiscal discipline had a positive effect on the private sector through the greater availability of credit in the domestic banking market. In addition, tax revenues are expected to meet the target of 14.5 percent of GDP.

The Rwanda tax body, Rwanda Revenue Authority (RRA), reports an increase in fiscal revenues as well as in non-fiscal revenues. According to the RRA, recent tax revenues, from January to June 2006, recorded an increase of US$ 20.78 million above the set target. The RRA collected a net revenue of US$ 173.28 million in the first six months of 2006 against a target of US $ 152.5 million, registering an increase of 113.6 percent.

Fiscal revenue collection amounted to US$ 167.2 million against the target of US $ 145.26 million registering 15 percent above the target. In non-fiscal revenue, the body collected US$ 6.09 million against the target of US$ 7.02 million registering a fall of 13.2% below the target. This under performance was mainly blamed on the less than expected sale proceeds from the former government vehicles.

The best performance, according to tax type in the six months, was registered by direct taxes. The tax body collected US$ 59.5 million against a target of US$ 43.5 million, equivalent to a performance of 136.6 percent. Taxes on Goods and Services marginally surpassed the target level by 0.1%, collecting US$ 75.79 million against a target of US$ 75.5 million. Taxes on International Trade amounted to US$ 25.4 million registering a 115.6 percent performance against a target of US $ 21.8 million.

The tax revenue body said the tax performance resulted in series of different measures. Those include the efficiency gains that have accrued from computerization of the tax collection processes and the increased capacity building initiatives and administrative reforms carried out by the authority in the previous years.

There is also the increased compliance of large companies in filing quarterly returns for profit tax, high Pay As You Earn (PAYE) performance due to taxation of fringe benefits and the strict enforcement and audit activities applied by the RRA staff. In addition, there has been vigorous enforcement measures that led to the recovery of arrears and the increased operational efficiency accruing from the use of the computerized systems.

Finance Minister Musoni stated that Government expenditures have been under control and priority spending was on target during the first half of 2006 and is likely to remain like that for the rest of the year. Monetary aggregates were also broadly on target for that period and its debts have been canceled.

“Rwanda reached the completion point under the enhanced Initiative for Heavily indebted poor Countries (HIPC) in 2005,” he said. “Thus, total debt relief under the enhanced HIPC Initiative from all of Rwanda’s creditors was estimated at US $ 1.4 billion from a total debt stock of US$ 1.5 billion.”

Rwanda was paying US $ 50 million per annum on debt servicing, but after the recent debt cancellation the servicing amount will be US $ 3.5 million. The debt cancellation was approved by the International Development Agency (IDA), International Monetary Fund (IMF) and the African Development Bank (AFDB).

Multilateral Debt Relief Initiative (MDRI) started last year. The IMF cancellation of debt took place on 21 December 2005. The World bank debt cancellation was approved in April 2006 with a reduction of US $ 280 million, with a 1 July 2006 effective date; in addition, the AFDB came up with a debt relief proposal in April 2006.

Minister Musoni said that Rwanda has already set up sustainability policies for debt management aiming at debt limits adapted to Rwanda‘s capacity of paying. He told GLCSS that Rwanda managed only US $ 20 millions of debt for next year but the State Minister for the same ministry, Monique Nsanzabaganwa, recently disclosed that following the last week meeting with country’s development partners the proposed amount of debt may triple or quadruple.” The current Rwanda economic performance shows that we are able to pay back the amount without any trouble,” she said.

Regarding the external debt, Oscar Masabo, Macroeconomic Director, told GLCSS that the LITP could potentially be financed without compromising debt sustainability using the new IMF World Bank framework referred to as Long Term Debt Sustainability (LTDS). However, this would involve a scenario combining realistic debt relief and an optimistic new financing scenario in which flows increase by around 50 percent compared to currently projected levels. Such a scenario would produce a peak export ratio of 167 percent, compared to Rwanda ‘LTDS benchmark of 200 percent.

Simulations have also been conducted to analyze the affects of the Multilateral Debt Relief Initiative (MDRI) on debt sustainability. The immediate impact of the MDRI is that the debt ratios will fall dramatically to 123 percent. However, the MDRI also has two other impacts. Rwanda’s debt will become sustainable, according to the IDA and African Development Fund (ADF) resource allocation indexes, resulting in the two institutions switching back from providing grants to providing loans to Rwanda. Secondly, the debt service reduction provided by MDRI, will be offset partly by a reduction in future disbursement from ADF and IDA.

In order to maintain debt stability, Macroeconomist Director Oscar Masabo told GLCSS that Rwanda will keep borrowing levels down and aid flows include a continued high proportion of grants. However, given that the ADF and IDA will be switching back to loans in the near future, it will not be possible to keep grants at the current level of around 80 percent of aid without a major increase in grants from other donors. In the context of renewed loans from AFDB and IDA, the analysis indicates that a borrowing ceiling averaging US$ 100 million a year for the next three years would allow maximum disbursement from the international community while keeping debt sustainable.

In addition, it will be vital for the sake of debt sustainability that the current minimum grant element of 50 percent in new borrowing be maintained ,at least for the next three years. This is not expected to reduce Rwanda’s access to external new financing significantly as virtually all lenders provide this grant element. Thereafter, Rwanda, depending on financing needs, absorptive capacity, and debt sustainability forecasts, the government might need to reduce the grant element to 35 percent.

Regarding domestic debt , Masabo said that the ministry has analyzed possible restructuring scenarios for the one remaining component of domestic debt which is in arrears, the debt of the government to the Social security fund institution (Caisse Sociale du Rwanda: CSR ). They found that the current option being discussed between the treasury and CSR is the best means of ensuring that domestic debt service remains low.

Rwanda has started organizing different national debt and aid strategies workshops to identify the prospects for financing Rwanda’s development strategy and long-term investment program, including a combination of grants, external loans, domestic financing and revenue mobilization. This will serve as a guide for mobilizing the best quality resources from the international community, and for improving Rwanda’s aid utilization procedures and absorptive capacity.


The Great Lakes Centre for Strategic Studies is a London-based think tank.



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posted by GLCSS at 9:57 AM  

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