Rwanda’s economy has rebounded strongly in 2021, and the recovery is expected to continue in 2022, supported by strengthened vaccination efforts, a pickup in external demand, and accommodative macroeconomic policies. Nevertheless, with a high portion of the population still unvaccinated, risks about the path of the COVID-19 pandemic remain significant and accelerating structural and economic reforms are needed to mitigate pandemic scars and ensure more inclusive and sustainable growth over the medium term. The Policy Coordination Instrument (PCI) continues to support the authorities’ efforts in the macroeconomic and structural reform agenda and ongoing economic recovery, while also ensuring policies are in place to reduce debt vulnerabilities and maintain macroeconomic and financial stability.

On January 10, 2022, the Executive Board of the International Monetary Fund (IMF) completed the 2021 Article IV Consultation ^[1] and the fifth review of the Policy Coordination Instrument (PCI). The PCI was approved on June 28, 2019 ( Press Release No.19/258 ) to facilitate macroeconomic and financial stability, while advancing an ambitious reform agenda under Rwanda’s National Strategy for Transformation (NST). Program performance remains broadly satisfactory overall.

Real GDP growth is projected at 10.2 percent in 2021 on the back of a recently accelerated vaccination campaign targeting high-infection areas, the pickup in external demand, continued government support, and base effects from the 3.4 growth contraction observed in 2020. While Rwanda’s medium-term outlook is positive, pandemic scars owing to school disruptions, learning losses, protracted unemployment, and rising poverty, especially among women, if not addressed, risk reversing hard-won economic and social gains over the last two decades.

Monetary and fiscal policies remain accommodative. Urgent temporary needs to boost social protection, address COVID-19 related health concerns, and undertake repairs from a recent volcanic eruption near the border with the Democratic Republic of the Congo are being accommodated and financed through the use of nearly 70 percent of the Special Drawing Rights allocation (1.9 percent of GDP) in FY 21/22 . Over the medium term, growth is projected to gradually converge to the pre-pandemic trend of 7.5 percent supported by strong Foreign Direct Investment (FDI), continued high public investment, and recovery in trading partner countries. Inflation is projected to move towards the benchmark level and be within the upper bound of the central bank’s tolerance level in 2022, driven by the pickup in domestic activity, global demand, and rising commodity prices. The current account deficit is projected at about 11 percent of GDP in 2021 and expected to narrow over the medium term financed by FDI and concessional loans. A credible fiscal consolidation post-COVID, exchange rate flexibility, and reforms to strengthen Rwanda’s external competitiveness are expected to cement macroeconomic and financial stability.

However, high uncertainty surrounds prospects for sustaining the recovery. The future course of the pandemic in Rwanda and globally remains highly uncertain. New waves of infections and new variants of the virus continue to undermine confidence and present a clear downside risk to the growth outlook and could lead to higher fiscal and external financing needs. On the other hand, building on the ongoing growth momentum, a stronger-than-expected impact of the fast vaccine rollout in the country and globally could provide an upside risk that would boost confidence and economic activity.

Policies under the PCI continue supporting the recovery from the pandemic, maintaining macroeconomic stability, and anchoring the medium-term fiscal policy framework and debt sustainability, while pushing ahead with macroeconomic policies and reforms, such as financial inclusion, digitization, and green public financial management (PFM) to deliver a more inclusive and sustainable growth.

Following the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, issued the following statement:

“The COVID-19 pandemic has raised unemployment and poverty in Rwanda, which risks reversing hard-won gains from the past decades. With the acceleration of vaccinations and the resumption of economic activities, a strong economic rebound is underway, although risks remain titled to the downside given the still low vaccination rate and the prospect of repeated COVID-19 waves. Program performance has been satisfactory, and the authorities’ continued commitment to their economic program under the Policy Coordination Instrument to achieve a sustainable and inclusive recovery is noteworthy in these challenging circumstances.

“Additional fiscal spending is expected in FY21/22 for urgent social needs and to support the recovery. The general allocation of Special Drawing Rights to Rwanda, equivalent to US$219 million, and the August Eurobond issuance, equivalent to US$620 million, will help reduce near-term liquidity pressures and support the country in coping with the impact of the pandemic.

“At the same time, it is critical that the authorities continue advancing growth-friendly policies and reforms that will underpin the credibility of the multi-year fiscal consolidation plan that is essential to safeguard debt and external sustainability. These efforts need to be complemented by measures to strengthen the management of fiscal risks from state-owned enterprises and public-private partnerships and by enhancing fiscal transparency.

“Monetary policy has been appropriately accommodative to support economic activity amid subdued inflation. Going forward, it will be important to closely monitor price developments and maintain a data-dependent monetary policy. Closely monitoring and containing credit risks is key to safeguard financial stability, including by deploying targeted and time-bound interventions, as needed, without relaxing regulatory and supervisory requirements. Continued efforts to enhance the AML/CFT framework are also recommended.

“Keeping up the momentum on structural reforms, including progress on the Sustainable Development Goals and investing in human capital, is needed to limit pandemic scars and pave the way for a sustainable and inclusive recovery. The progress made in climate change adaptation readiness and the steps being taken to embed climate considerations into policy planning are welcome. Rwanda will need to rely heavily on concessional financing and private sector support to meet these goals.”

^[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.