Recently the IMF Executive Board completed the Fourth Policy Support Instrument Review for Rwanda. The IMF observed that Rwanda’s strong policy performance has led to sustained growth, progress in reducing poverty, and a stable macro economic situation.

In an interview with Berna Namata, the IMF Resident Representative for Rwanda, Alun Thomas gives an insight into some key observations by the board.

--------------------------------------

In your report, Rwanda’s growth in 2015 was slightly stronger than expected. How did you come to this conclusion?

The team (IMF) visited in October and by that time we had two quarters of growth running at 7-7.5 per cent. We had forecast 6.5 for the year. That was the initial thinking behind the upward revision to 7 per cent.

The sources of growth, agriculture, still maintains its momentum at about 5 per cent; industry and services are running at about 7 per cent (first 3 quarters of the previous year) and consistent with the pattern in previous years. If you are going to pick specifics, construction has been strong, you can see that by looking around town, at the new hotels, businesses and housing.

On the services side, information technology, financial services and health were quite impressive as well last year. The downside of course is the negative mineral growth rate.

Looking at the numbers we felt comfortable in raising it to 7 per cent.

Now forecasts are moving targets and the latest estimate in Q3 showed growth coming down to 6 per cent so in the end we may still be looking at 6.5-7 per cent as a final year total.

One of the constraints which is going to continue to bite is lack of foreign exchange. I think that the constraint is beginning to have an effect on the growth with agriculture (essentially not needing foreign exchange) growing strongly in the third quarter at 6 per cent but industry and services which have a large import content starting to slow down.

Going forward, many individual construction projects are coming to completion so we think that there maybe a slowdown in growth in 2016, especially combined with the continued foreign exchange constraint. We don’t see much of a pickup in mining; prices in the beginning of the year remain low.

Last year the Rwandan franc depreciated on annual basis by 7.6 per cent from 3.6 per cent in 2014. How do you gauge the Central Bank’s response to the foreign exchange pressures?

I think the Central Bank has to look at the level of the exchange rate versus the volatility in the exchange rate.

Some foreign exchange dealers were offering up to Rwf800 per dollar, once the exchange rate starts getting out of hand it’s very hard to bring it back.

The central bank actions have been successful because the parallel market spread (the spread between the exchange rate offered at foreign exchange bureaux and the central bank) has fallen.

On the other side of the coin, a typical response to a lack of foreign exchange while maintaining foreign exchange reserves is to allow the exchange rate to depreciate, make imports more expensive and let the market determine import demand.

So there is a tension between supporting a currency to avoid it getting out of hand and allowing exchange depreciation to contain import demand. The IMF view discussed in our recent report is that prospects for reserves are not very promising and there is a need for some exchange rate adjustment.

The government also has to help reign in some import demand through expenditure restraint since the public sector is a big part of the economy and demands a lot of imports.

The rationale for suggesting some policy adjustment is that it can facilitate a smooth landing. This outcome is preferred over a situation in which the government and Central Bank suddenly realise that the forex coffers are at critical levels and the economy has to adjust abruptly to remain afloat.

Traditionally Rwanda has maintained a comfortable level of reserves at 4 months of imports. What is the current state of reserves given the pressure on the foreign exchange?

Today, we are below that, we are probably running at 3.5 to 4. The trend has been down for the past few years, partly related to the decline in foreign aid. Our preference is for the Central Bank not to lower reserve cover much below this. On the other hand, to maintain a comfortable growth rate and help grease the economy, there is still some room for foreign exchange sales from the Central Bank.

In the short-term, we know that commodity prices will remain low which means export revenue will remain limited, despite ongoing efforts to diversify the export base this is in addition to a general slowdown in the global economy.

What are the policy options under such circumstances?

If you look at the global economy, there are challenges in terms of commodity demand and prices, and export diversification takes time. The challenge therefore is to maintain reserve cover at 3 to 4 months of imports.

This is why in our statements we are suggesting the need for some depreciation of the currency and expenditure restraint in the next budget. Moreover, the reserves in the commercial banks have also come down quite a bit over the past year because the economy has kept its momentum but export receipts have come down.

How would you assess progress so far in terms of boosting domestic revenue?

I think they have done well, if you look back at 2011/12, tax revenue was at 13 per cent of GDP, latest figures are 15.4 per cent for 2014/15. So in 3 years they have managed to raise the tax ratio by about 2 per cent of GDP which is good in comparison with other countries.

Since they have started from a low base compared with their regional peers, there is still a long way to go. In the PSI we have an objective of 16 per cent GDP by 2017/18 but this should be achieved comfortably since they are doing a lot of measures on tax administration.