The International Monetary Fund has urged the government to limit domestic borrowing in its bid to plug budget deficit.

IMF said domestic borrowing will slow down private sector growth due to competition for funds that triggers high interest rates.

IMF official Paulo Drummond told Treasury to explore alternative sources of revenue mobilisation for projects in the next financial year, set to begin on July 1.

“The next fiscal year does not only aim at gradually increasing revenue mobilisation, but also witnessing a less significant domestic financing of the budget,” said Mr Drummond, IMF mission chief, who recently visited the country.

The country’s domestic and external debt stands at 23 per cent of gross domestic product (GDP).

The government has been borrowing from domestic market by issuing Treasury bills and bonds to fix short-term funding gap.
“For the coming year, we are working with government in improving revenue administration, broadening the tax base and eliminating tax evasion,” added Mr Drummond.

In the past four years, government raised Rwf30 billion from Treasury bonds and currently has outstanding Rwf10 billion in Treasury bonds listed on the Rwanda Stock Exchange.

“IMF is not restricting the government from short-term financing, but they are telling us to do it the right way that will not affect private sector’s borrowing from commercial banks,” said Finance and Economic Planning Minister Claver Gatete.

Experts warn that when the government borrows more from the domestic market, interest rates are likely to go up, and the private sector is crowded out.

“Government instruments are the safest and the less the government borrows, the more interest rates are likely to remain stable,” said Celeste Rwabukumba, co-ordinator of Rwanda Stock exchange.

Mr Rwabukumba said the IMF’s prescriptions were important especially for economies where the banking sector is still developing.
Rwanda two weeks ago became the first East African Community member state to issue a Eurobond to mobilise funds from the international market.  

Eurobond oversubscribed

Rwanda’s $400 million Eurobond was oversubscribed, with market experts saying this reflected confidence in the country’s governance and economic prospects among international investors.

(Read: Investors scramble for Rwanda’s Eurobond)

Some 250 investors from the US, Europe and Asia scrambled for the 10-year bond, which carries a coupon rate of 6.625 per cent, the lowest among Eurobonds listed by African countries like Zambia, Ghana and Nigeria.

The bond was subscribed up to $3.5 billion and rated B by Standard & Poors and Fitch
The taxman projected to collect over Rwf700 billion in current financial year in the wake of aid freeze by key international partners.

Rwanda’s total budget for the financial year 2012/2013 is slightly over $2.5 billion and government expects to finance about 54 per cent of the budget compared to 51 per cent during 2011/2012 financial year.
Of the total budget, over Rwf700 billion ($1.15 billion) will be generated internally compared to over Rwf600 billion ($992 million) generated last year representing a 21 per cent increase