An International Monetary Fund (IMF) mission, led by Haimanot Teferra, held meetings with the Rwandan authorities during March 22 – April 4, 2023, to discuss the first reviews of Rwanda’s Policy Coordination Instrument (PCI) and program under the Resilience and Resilience and Sustainability Facility (RSF). The PCI and RSF arrangement were approved on December 12, 2022, the latter with a total amount of SDR 240.3 million (about US$ 319 million).

At the conclusion of the mission, Ms. Teferra issued the following statement:

“The Rwandan authorities and IMF mission team reached staff-level agreement on the economic and financial policies needed to complete the first reviews under the PCI and RSF arrangement. The agreement is subject to approval by the IMF Management and Executive Board. Consideration by the Board is tentatively scheduled for May 2023. Upon completion of the Executive Board review, Rwanda would have access to SDR 55.46 million (equivalent to about US$ 74.6 million) under the RSF.

“Performance under the program has been strong. All quantitative targets for end-December 2022 have been met and all reform targets under the PCI and reform measures under the RSF envisaged for the first reviews are progressing well and expected to be completed ahead of the Executive Board discussion.

“While the economy registered a strong growth, macroeconomic imbalances have emerged. GDP growth was 8.2 percent in 2022 as strong output in the manufacturing and services sectors more than offset weaker-than-expected agricultural production and a sharp slowdown in construction activity. Rising food prices, linked to the weak agriculture performance due to unfavorable weather conditions, and strong domestic demand kept headline inflation persistently above 20 percent in recent months. The high core inflation, at 14.4 percent in February, signals broad based and persistent inflationary pressures in the economy. Robust import demand coupled with high commodity prices and tightening global financing conditions have weakened Rwanda’s external position. Despite a faster pace of exchange rate depreciation, external buffers were significantly reduced with foreign reserves declining to 4.1 months of prospective imports at end-2022.

“Rwanda remains vulnerable to the shock-prone external environment, necessitating the urgent need to re-build policy buffers. Another spike in global energy and fertilizer prices, a steeper decline in trading partners’ growth, or global financial market and geopolitical developments that adversely affect the availability of concessional resources will further strain external buffers and limit the policy space to confront developmental challenges and address climate change. The authorities will need to further tighten the fiscal and monetary stance to rebuild policy buffers.

“Maintaining fiscal sustainability calls for raising domestic revenues, while containing non-priority current and capital expenditures. A timely implementation of the revised excise and corporate income tax laws and plans to step up efforts to develop a medium-term spending rationalization strategy will support the envisaged fiscal consolidation. Ongoing reforms to adopt more effective and transparent public financial and investment management practices should accelerate and the institutional capacity to assess and manage SOE fiscal risks needs to be strengthened.

“The National Bank of Rwanda should pursue a more decisive monetary policy tightening to contain inflationary pressures and promote exchange rate flexibility to ensure external stability. Data-dependent monetary policy and strengthening communication would help to contain the second-round effects and anchor inflation expectations. Greater exchange rate flexibility remains key to safeguarding reserves while foreign exchange market interventions should be guided by a robust policy framework . Reforms to enhance monetary policy operations and deepen money and government securities markets would need to be accelerated to improve the efficiency of monetary policy transmission. While the banking sector remains well-capitalized and liquid, the authorities need to continue monitoring credit risk and prudent loan classification and provisioning.

“The ongoing structural reforms to tackle pandemic scarring and enhance socioeconomic resilience should be fast-tracked to speed up access to health care and education, address learning losses, promote regional trade integration, and the scale up and better targeting of social protection in a targeted manner.

“Continued reforms to allocate climate resources more effectively and transparently will be key to mobilizing additional climate funding and achieving Rwanda’s ambitious climate agenda. The authorities made good progress with strengthening their institutional capacity to integrate climate-related considerations in the design of macroeconomic policies and frameworks. Green public finance management and climate-specific public investment management reforms will improve the authorities’ decision making and create a conducive environment for attracting climate finance from development partners and from stakeholders looking to support Rwanda’s climate efforts. Establishing guidelines for financial institutions on climate-related risk management and introducing standards for development of markets for sustainable finance products will also support private green investment.

“The mission is grateful for the authorities’ excellent cooperation and candid and constructive discussions and reaffirms the IMF’s support for the government’s efforts to implement its economic reform program.”