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The IMF is working with Rwanda on its medium-term strategy

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By JOHN GAHAMANYI

Posted  Saturday, February 23  2013 at  20:18

In Summary

  • Rwanda last week reduced its spending by more than $99 million, freezing recruitment of public sector workers and slowing implementation of some projects, as it deals with the prolonged suspension of aid by some donors.
  • Jobless Rwandans are the biggest losers in a supplementary budget approved by Parliament last week, which seeks to sharply cut public spending in the wake of revenue shortfalls and rising expenditure.
  • Treasury will reduce spending on public sector wages by Rwf14 billion ($22 million) while the development budget will be cut by Rwf18 billion ($28.4 million).
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Rwanda’s economy faces tough times due to suspension or delays in donor funding. This saw the government forced to cut spending by Rwf74 billion ($117 million) between July and December last year. 

The EastAfrican’s John Gahamanyi spoke to the IMF resident representative to Rwanda, Mitra Farahbaksh about the state of the country’s economy and what the government can do to deal with the potential risks and opportunities.---

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Rwanda’s domestic revenue is insufficient to fund government expenditure, meaning the country has to rely on donor aid.  What measures are required to boost domestic revenue? 

The government has to reduce its aid dependency through greater domestic resource mobilisation. At the request of the government, the Fund’s technical assistance mission visited Kigali late last year and made a number of recommendations for designing a medium-term strategy for significantly increasing the revenue-to-GDP ratio.

Specifically, it identified eight critical areas, where the focus must be to address weaknesses in tax policy and revenue administration.

These are improving taxpayer compliance, strengthening the tax policy unit, improving tax gap analysis, revising the investment code to reduce exemptions, complementing withholding taxes on dividends and interest by a capital gains tax at a similar rate; and reforming the VAT.

Specifically, when will these measures be implemented?

During the course of the next IMF mission to Kigali, in April, the Fund will discuss with the government the specific measures and the timing of their implementation as well as how much benefit each measure will yield in terms of increasing revenues.  

Rwanda is keen to look for other means of financing; one of them is issuing a Eurobond. Given the current macroeconomic conditions, how would you gauge Rwanda’s ability to raise money in the international debt market?

Typically, investors will look at a number of factors when deciding to purchase sovereign bonds. They will consider a country’s macroeconomic situation, the level of a country’s debt and the ability of the country to pay its debt.

Rwanda’s macroeconomic conditions have been very good. The economy grew by 8.6 per cent in the first six months of last year. Inflation has been declining.

The macroeconomic outlook remains generally favourable. The country’s debt is about 21 per cent of GDP, which is reasonable. However, there is uncertainty about donor aid and how it is going to affect the economy and its macroeconomic position.

The government has borrowed aggressively in recent years to finance strategic investments like the national carrier RwandAir and the multimillion-dollar Convention Centre. Are you concerned that this aggressive borrowing could affect the country’s current debt status, which according to you, is reasonable?

 The debt sustainability analysis prepared by the IMF and the World Bank shows that assuming that aid flows will resume in the first half of 2013, Rwanda’s debt remains sustainable over the medium term. As I said earlier, the debt to GDP ratio is about 21 per cent. It remains sustainable at this time.

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