40315 INTERNATIONALMONETARYFUNDAND INTERNATIONAL DEVELOPMENT ASSOCIATION RWANDA EnhancedHeavilyIndebtedPoor Countries(HIPC) Initiative CompletionPointDocument Prepared bythe Staffs o f the International Monetary Fundand the InternationalDevelopment Association Approved by Sharmini Coorey and Mark Plant (IMF) and Gobind Nankani and Danny Leipziger (IDA) March25. 2005 Contents Page Executive Summary........................................................................................................................ 4 I Introduction......................................................................................................................... 5 . I1. Progress on the Conditions For Reaching the Completion Point ....................................... A.Rwanda's PovertyReduction Strategy andUse o fEnhanced HIPC Debt Relief..........56 B.Macroeconomic Stability ............................................................................................... 9 11 D.Social Reforms............................................................................................................. C. Structural Reforms inthe Tea Sector ........................................................................... E.ReformProgress Beyond CompletionPoint Triggers.................................................. 12 13 F. StaffAssessment........................................................................................................... 13 I11. Delivery o fDebt reliefand Long-term Debt Sustainability.............................................. 14 A.Reconciliation o fDecisionPoint Debt Data................................................................ 14 B. Status ofCreditor Participation.................................................................................... 15 Multilateral creditors ............................................................................................. 15 16 C.UpdatedDebt Sustainability Analysis.......................................................................... Bilateral and commercial creditors ....................................................................... 17 Debt sustainability at end-2003............................................................................. 17 18 D. SensitivityAnalysis andLong-Term Debt Sustainability............................................ Debt sustainability over the period 2004-23 ........................................................ 20 Scenario 1:Terms o f trade shock.......................................................................... 20 Scenario 2: Reduction o f extemal grants .............................................................. 21 21 Summary ............................................................................................................... Scenario 3: Higher GDP growth ........................................................................... 22 - 2 - Contents Page IV. 22 A.Decompositiono fthe Increase inthe NPV ofDebt-to-Exports Ratio......................... Consideration o f a Topping-Up o f Enhanced HIPC Initiative Assistance ........................ 23 Newborrowing ..................................................................................................... 24 Exchange rate changes.......................................................................................... 24 Export performance .............................................................................................. Discount rate changes ........................................................................................... 26 27 B.OtherConsiderations Affecting Rwanda's Economic Circumstances......................... 30 C. StaffAssessment .......................................................................................................... 30 V. Conclusions....................................................................................................................... 32 VI. Issues for Discussion......................................................................................................... 32 A.Policy Coordination andDebt Strategy........................................................................ 57 B DataRecording andReporting..................................................................................... . 58 C. Analytical Capacity and Staffing.................................................................................. 58 Boxes 1. 7 Selected Structural Reforms. 2000-04 ............................................................................... Status o f Triggers for the HIPC Floating Completion Point................................................ 2. 14 3. Macroeconomic Assumptions Underlyingthe Debt Sustainability Analysis at the Completion Point .............................................................................................................. 19 4. Factors UnderlyingRwanda's Export Performance........................................................... 28 Figures 1. ProjectedNPV o f Debt-to-Exports Ratio. 2003-19 ........................................................... 19 2. Percentage Deviation o f Export Volumes from Decision Point Projections, 1999-2003 ................................................................................................... 26 3. Percentage Deviation o f Export Prices from Decision Point Projections, 1999-2003 ................................................................................................... 27 4. Change inExport Prices Since Decision Point, (Moving Price Indices for Merchandise Exports, 2000=100) ............................................................................. 29 5. International Coffee and Tea Prices, 1995-2015................................................................ 30 6. 34 External Debt and Debt-Service Indicators ....................................................................... Composition o f External Debt ........................................................................................... 7. 35 8. Sensitivity Analysis, 2003-23 ............................................................................................ 36 Tables 1. Priority Spending. 1998-2004 .............................................................................................. 9 2. Selected Economic and Financial Indicators, 1999-2004 ................................................. 10 3. Breakdown o f the Increase o fNPV o f Debt-to-Exports Ratio .......................................... 25 4. Structure o f External Debt by Currency Denomination..................................................... 26 5. Selected Social and Demographic Indicators..................................................................... 37 6. Selected Economic and Financial Indicators, 2000-08 ..................................................... 38 - 3 - Contents Page 7. Observance of Quantitative and Structural Perfonnance Criteria and Benchmarks UnderPRGF Arrangement. 2001-04 ......................................................... 39 8. Nominal andNet PresentValue of External Debt Outstanding at End-1999.................... 42 9. Status of Creditor Participation for H P C Assistance as Approved at the DecisionPoint................................................................................................................. 43 10. Delivery of IDAAssistance Under the EnhancedHIPC Initiative .................................... 44 11. Delivery of IMFAssistance Under the EnhancedH P C Initiative .................................... 45 12. Paris Club Creditors' Delivery ofDebtReliefUnder BilateralInitiativesBeyond the H P C Initiative.......................................................................................................... 46 13. Discount Rate and ExchangeRateAssumptions at the DecisionPoint and at the Completion Point................................................................... 47 14. Nominal andNet PresentValue of External Debt Outstanding at End-2003 .................... 48 15 Balance ofPayments, 2003-23 .......................................................................................... 49 16. 50 Net PresentValue of ExtemalDebt, 2003-23 ................................................................... Main Assumptions Used for the DSA at the Completion Point, 2003-23 ........................ 17. 51 18. Extemal Debt Service After FullImplementation of Debt-ReliefMechanisms, .................. 2003-2023 ....................................................................................................................... 52 19. ExtemalDebt Indicators, 2003-23 .................................................................................... 53 20. Sensitivity Analysis, 2003-23. ........................................................................................... 54 21. EnhancedHIPC Initiative Assistance Levels andPossible Topping-Up at Completion Point ............................................................................................................ 55 22. HIPC Initiative: Status of Country Cases ConsideredUnderthe Initiative, February 11,2005 ........................................................................................................... 56 Appendices I. Public Debt Management.................................................................................................. 57 A.PolicyCoordination andDebt Strategy........................................................................ 57 B.DataRecording andReporting..................................................................................... 58 C .Analytical 58 11. Debt Sustainability Analysis for Low Income Countries.................................................. Capacity and Staffing.................................................................................. 60 - 4 - ExecutiveSummary a InDecember2000, the ExecutiveBoardsof the IMFandIDA agreedthat Rwandahadmetthe requirementsto reachthe decisionpoint under the enhancedHIPC Initiative.The debt sustainability analysis (DSA)based on end- 1999 data indicated at the time that a debt relief o fUS$452.4 millioninnet present value terms (NPV) was requiredunder the Initiative, to lower the NPV o f debt-to-exports ratio to 150 percent. a The staffsof IDA andthe IMFare of the opinionthat Rwandahas made satisfactoryprogress to reachthe completionpointunderthe HIPC Initiative.All triggers have beenmet, except for the one with respect to the tea sector, which has not been fully implemented.Inview o f the strong performance inmost policyareas, particularly ineducation andhealthwhere the completion point triggers have been surpassed, and giventhe completion o f the fourth review under the PRGF arrangement, the staffs recommend a waiver o fthe trigger related to the tea sector. a The staffs now projecta substantialworseningof debt indicatorscompared with the projectionsmade at the decision point.An updatedDSAbased on end-2003 data indicates that the NPV o f debt-to-exports ratio at end-2003 after fulldelivery o fHIPC assistancestood at 326 percent compared with 193 percent projected at the decision point. Moreover, despite ambitious assumptions regarding the degree o f grant financing (83 percent o f total financing with the remainder filled by loans on standard IDA terms), the revisedratio would peak at 343 percent in2004 before declining to 171percent by 2023. At the decision point the ratio was expected to drop below the 150percent HIPC threshold in2008 and stay below that threshold throughout the forecast period. a The staffs are of the view that the substantialdeteriorationin Rwanda's NPV of debt-to-exportsratio, comparedwith the decisionpointprojections,is primarily attributableto fundamentalchanges inthe country's economic circumstancesdue to exogenous factors. Lower export prices, changes incross- currency exchange rates, and a lower-than-expected concessionality o f new borrowing were all unambiguously exogenous and outside the control o f the authorities. Moreover, staffs have presented additional analysis establishing lower discount rates as an exogenous and fundamental factor causing a deterioration in Rwanda's NPV o f debt-to-exports ratio. All these factors account for more than 50 percent o fboth the unanticipated andthe total increase and thus provide sufficient justification for topping-up o f debt reliefat the completion point. In addition, the unanticipated increase o f import prices comparedwith decision point projections can be expected to have a lasting negative impact on Rwanda's terms- o ftrade and, consequently, its capacity to repay its debt. Taken together, these facts support the case that Rwandameets the requirementsfor topping-up o f HIPC assistance at the completion point. - 5 - I.INTRODUCTION 1. InDecember2000, the ExecutiveBoardsof the InternationalMonetaryFund (IMF) andthe InternationalDevelopmentAssociation(IDA) agreedthat Rwanda hadmetthe requirementsto reachthe decision pointunderthe EnhancedHeavily IndebtedPoor Countries(HIPC) Initiative.'At that time, a set o ftriggers was established for Rwanda to reach the floating completion point. This paper assesses Rwanda's progress inmeetingthose triggers, and seeks the Boards' approval o fthe HIPC completion point, including a waiver o f one o fthe completion point triggers, and a topping-up o f assistance under the Initiative. 2. At the decisionpoint,the debt relief requiredto lower the NPV of debt-to- exports ratio to the 150percentthresholdunderthe EnhancedHIPC Initiativewas estimatedto be US$452.4 millionin NPV terms. This reliefrepresented a 71.3 percent reductiono fRwanda's debt, inNPV terms, after full use o ftraditional debt relief mechanisms. The Boards o f the IMF andIDA also agreed to provide Rwanda with interimdebt reliefuntilRwandareachedthe floating completionpoint. As o f end-2004, the IMFhas delivered interimassistanceinthe amount o fUS$20million innominal terms, and IDA has provided interimreliefinthe amount o f US$56.5 million. Rwanda has also benefited from interimdebt relief from the African Development Bank Group (AfDB), the Arab Bank for Economic Development inAfrica (BADEA),the OPEC Fundfor Intemational Development (OPEC Fund),the EuropeanUnion, and Paris Club creditors. 3. The rest of the paper is organized as follows. Section11assessesRwanda's progress inmeeting the conditions for reaching the completion point. Section I11 discusses the current status o f the delivery o f HIPC debt relief andpresents the results o f an updatedD S A based on end-2003 data. Section IV discusses considerations for a topping-up o f the assistance under the Enhanced HIPC Initiative. The conclusions are summarized in section V. SectionVI presents issues for discussion. 11. PROGRESSONTHE CONDITIONSFORREACHINGTHE COMPLETIONPOINT 4. Rwandahas madesatisfactoryprogressin meetingthe conditionsfor reachingthe completionpoint(Box 1).As set out inthe decisionpoint document, the conditions for reaching the completion point were (i) completion o f a full Poverty Reduction Strategy Paper (PRSP), with satisfactory implementation for at least one year and budgetary savings from the HIPC Initiative usedto increase expenditures inpoverty reduction programs; (ii) maintenance of macroeconomic stability; (iii) progress inthe reform o f the tea sector; and (iv) the implementation o fkey social measures ineducation, 'See h~:i/ww~v.imf.or~/exter11al/n~lhi~cl2OOO/rwaini;ad~.pdf andhttp://~~.worldban~.or~~ipc, "Rwanda-Enhanced Heavily IndebtedPoor Countries(HIPC) Debt Initiative DecisionPoint Document" (EBSi001265; 12/12/00) andIDA/R2000-240(12/13/00). - 6 - health, and HIV/AIDS and the adoption and implementation o f a gender actionplan. All triggers have been met, except for the one with respect to the tea sector. Progress inthe reforms o f the tea sector has been satisfactory, but the trigger was not fully met as the authorities did not receive acceptable bids for the sale o f one tea factory. The following sections present progress made bythe government infulfilling the completionpoint triggers. A. Rwanda's PovertyReductionStrategyandUse of EnhancedHIPC DebtRelief 5. Followingextensive consultationswith civil society andother stakeholders, the authoritiesfinalizedthe PRSPinJune 2002.2The PRSP identifies six broadareas as priorities: (i) rural development and agricultural transformation; (ii) human development; (iii) economic infrastructure; (iv) good governance; (v) private sector development; and (vi) institutional capacity building. 6. Implementationof the PRSPhasbeenbroadlysatisfactoryas described in the annualprogress reports(APRs).~ Using awide set o f financial, economic, and social indicators, the APRs highlightedimproved performance inthe social sectors, particularly ineducation andhealth, and progress in strengthening the overall institutional and legal framework, including inthe financial sector. Great strides have also beenmade indonor coordination and dissemination o f information. On the latter, steps have been taken to improve the capacity o fthe media to broadenparticipation and increase the dissemination o f information by grantingmore private radio licenses. Moreover, the government enhanced the teaching capacities and curriculum at the School o f Journalism andi s developing a strategic plan for the media that was finalized at end-2004. However, the APRs also acknowledgedpolicy slippages in2003, slow progress inagricultural transformation and decentralization, as well as weaknesses in sectoral monitoring and reporting. 7. Priorityspendingalmostdoubledbetween1998 and2001, when Rwanda started to receive HIPC relief(Table 1).Specifically, priority spendingstood at 2.8 percent o f GDP in 1998 and increased to 4.0 percent by2000, with more than 80 percent o f expenditure going to education duringthose years. By2001, priority spending hadincreased to 5.3 percent o f GDP. This contrasts with an average o f See "Rwanda-Poverty Reduction StrategyPaper-Joint Staff Assessment," EBDl04147 (512112004) and www.worldbank.orq Report No. 28350-RW (511812004). See "Rwanda-Poverty Reduction StrategyPaper First Annual Progress Report-Joint StaffAssessment," EBDl04147 (512112004) andIDA Report No. 28350-RW; and"Poverty Reduction StrategyPaper Second Annual ProgressReport-Joint Staff Advisory Note" EBDl05130 (3122105) and IDA No.-31679-RW, March 2005. Inlight ofpolicy slippages inthe secondhalf of 2003, a supplementto the secondAPR covering the last six months of 2004 was issuedonMarch 10,2005, to document a one year track record of satisfactoryimplementationof the PRSP (2004). - 7 - Box 1.Statusof HIPC CompletionPoint Triggers Triggers Status PRSP: (i)implementation Completionof a full PRSP and satisfactory Met,The full PRSP was finalized inJune 2002 and discussedbythe for at least one year as Boards inJuly 2002. The first PRSP Annual Progress Report (APR) evidenced by the Joint Staff Assessment o f was completed inJune 2003 and the Joint StaffAssessment submitted the first annual progress report. to the Boards inMay 2004. The second PRSP APR, covering mid- 2003 to mid-2004, was issuedinNovember 2004 and a supplementto the APR covers the second half o f 2004. A Joint Staff Advisory Note (JSAN) i s issuedtogether withthis completion point document. (ii)BudgetarysavingsfromtheEnhanced Met.Priorityprograms have beenidentifiedbased onPRSP HIPC debt relief usedto increase priorities. Increases inexpenditures have beenmade for these expenditures on poverty-reducing programs. programs inthe budgets for 2001-04. Macroeconomicframework Maintenance of Met.Rwandahasbroadly maintainedmacroeconomic stability since satisfactory macroeconomic stability as evidenced the decisionpoint. Incompleting the fourth review under the PRGF by satisfactory performance underthe PRGF arrangement, Rwandahas shown a satisfactory track record o f policy arrangement. implementation. Structuralreform:Progress inthe reformofthe Not fully met. The reform o fthe policy andregulatory framework for tea sector, including privatization o f at least two tea is proceeding satisfactorily, although the authorities were not able o f the nine state-owned tea factorieslestates in to complete the sale o f one tea factory despite good faith efforts. accordance with the strategy agreed inthe context o f the IDA'SEconomic Recovery Credit. A law to redefine the role of the state marketing board (OCIR-Tht) was adopted in2003. OCIR-Tht's transition to this new role i s ongoing. Prices are now negotiated between farmers and factories, based on production costs and world market conditions. The sale transfer ofPfbdatea factory was completedinNovember 2004. Mulinditea factory reached the point o f sale inNovember 2003. However, during the negotiations, the government assessedthat the proposedterms o f sale were not beneficial to the industry andthe economy. A new invitation to bid for Mulindiwill be launched in 2005 with PhaseI1o f the privatization covering 4 additional factories. Currently, the government i s inthe process o f choosing the firmto act as transaction advisor for the secondphaseof I privatization. Technical proposals have beenreceived frompotential firms, and are being assessed. Once a firmis chosen, the bidding process for the second phase will be launched andbidding i s expected to start inthe second halfo f 2005. Education sector: (i) increasing net primary school enrollment Met.Netprimary school enrollment o f 73 percent was achieved in from 69 percent in 1999to the target o f 73 2001. Net enrollment is currently at 95 percent. percent in2001. (ii)makingoperationalatleast6primary Met.In2001/02, 11Teacher Training Centers offering full time and teacher training centers offering full-time in-service training became operational. However, their programs will and in-service training programs. needto be upgradedfollowing the Teacher Deployment and Management reform expected in2005-06. (i)community the establishment of the framework for Met.In2001, the ministry for education(MINEDUC) decentralized participation insupport o f the system o f education. The framework for community participation primary and secondary education. insupport ofprimary and secondary educationhasbeenestablished and i s now operational. - 8 - Box 1. Status of HIPC Completion Point Triggers Triggers Status (ii)thedesignandimplementationofacapacity- Met. A framework for the capacity building programhas been buildingprogram for the management o f designed, and implementation initiated. Itwill be revised to reflect the education at the central and decentralized results o f the ongoing civil service reform. levels. Health Sector: (1) the full staffing and equipping o f at least Met. Estimates suggest that, as of February 2003, as muchas 50 percent o f the district health centers; 70 percent o f health centers have been equipped and fblly staffed. (ii)theadoptionandimplementationofnational Met. The Roll Back Malaria Strategic Plan for 2004-10 has been plans to reduce morbidity and mortality due developed incollaboration with donors. Implementation i s ongoing to malaria, and reduce infant mortality and with good progress inproviding subsidized treatment, supporting maternal mortality; and distribution o f impregnated bed nets, building on preventive treatment through other programs, and addressing drug resistance. T o reduce infant and child mortality the government will: (i) continue strengthening the Expanded Programof Immunization w h c h i s one o f the strongest inAfrica with DPT3 (diphtheria, pertusis, tetanus) coverage rates o f over 96 percent; and (ii) enhance the IntegratedManagement of Childhood Illnesses to strengthenthe quality of care for children under five at boththe clinical and community levels. The government i s implementing its national Reproductive Health Policy which focuses on: good motherhood and infant health, family planning, STI management, adolescent health, andprevention and care o f sexual violence and empowerment o f women. (iii)adoptionandimplementationofa Met. A framework i s inplace which details the nature o f cooperation framework for the coordination o f public, between the ministry o f health (MOH) and the private sector. The private, and NGO health providers. goal is to encourage greater participationand integration o f the private sector into health districts. T o this end, the MOHplans to strengthenits regulatory and supervisory capacities, and will continue to rely on contracts which stipulate the roles and responsibilities o f each party. HIV/AIDS: Met. The 2002-06 HIViAIDS Strategic Plan was prepared ina The adoption and implementation o f a new participatory fashion, validated by all key stakeholders in2002 and Strategy and Action Plan for HIV/AIDS control adopted by the Cabinet o n February 19,2003. Implementationi s solid and prevention. with notable progress indecentralizing the programto the provinces, mobilizing all segments o f the population, improving sentinel surveillance, expanding HIV testing and increasing access to ARV (Anti-Retroviral) treatment. Gender: Met. A Gender Action Plan (2001-05) was adopted by Cabinet at The adoption and implementation o f the end-2000 and a Comprehensive Gender Action Plan to eliminate Comprehensive Action Plan to eliminate gender gender disparities inthe law was adopted in2003. Implementation o f disparities. the Plan is ongoing, including gender sensitive reforms o f the Constitution, the Land law and the adoption o f an anti-discrimination law (adopted by the National Assembly inOctober 2001 outlawing discrimination against anybody, "whether based on ethnicity, color o f the skin, physical features, origin, sex, opinions, religions"(Law N o 47/2001)). - 9 - Table 1. Rwanda: Priority Spending, 1998-2004 (InpercentofGDP, unless otherwisestated) 1998 1999 2000 2001 2002 2003 2004 Total priority spending 2.8 3.9 4.0 5.3 6.2 6.9 8.5 Education 2.2 3.2 3.2 3.5 3.9 4.2 4.0 Health 0.4 0.5 0.6 0.7 0.8 0.6 1.o Agriculture 0.0 0.0 0.0 0.2 0.3 0.2 0.2 Export promotion 0.0 0.0 0.0 0.0 0.0 0.0 0.4 Transport and communication 0.0 0.0 0.0 0.1 0.3 0.4 0.3 Infrastructure (energy andwater) 0.0 0.0 0.0 0.0 0.2 0.0 1.1 CommonDevelopment Fund (CDF) 0.0 0.0 0.0 0.0 0.1 0.4 0.3 Other 1/ 0.2 0.2 0.2 0.9 0.5 1.o 1.3 Memorandumitems: HIPC relief 0.0 0.0 0.0 1.4 1.5 1.3 1.4 Total expenditure(billions ofRF) 117.4 126.5 131.7 158.1 174.6 216.0 275.4 Nominal GDP (billions ofRF) 621.3 644.9 705.7 754.3 825.0 905.3 1054.3 Sources: Rwandese authorities; and IMFand IDA staff estimates. liThiscategoryincludes,interalia,spendingoninternalaffairs,localgovernment,commerce,andyouthandsports. 3% percent of GDP during 1998-2000, and represents an increase o f 1.8 percentage points by 2001 relative to the average after the start o fHIPC relief (which provided increased resources of, on average, 1.4 percentage points o f GDP). Since 2001, the coverage o fpriority spendingwas extended and has increased again, byclose to 60 percent, to reach 8.5 percent of GDP in2004. This increase reflects a slightlyhigher allocation to education and health, as well as a focus on new priorities such as infrastructure and decentralization, and, in2004, electricity and export promotion. Since 2002, priority spending has been guidedby the PRSP. 8. Substantialimprovementsin expendituremanagementare safeguarding priority spending. Most importantly, since 1999, the government has maintainedthe policy o fprotecting social sector budget allocations from cuts duringthe course o f the fiscal year; and military spendinghas progressivelybeenreduced, which has also enabled a reallocation o f resources to priority areas. Moreover, since the 2002 budget cycle, expenditures have beenclassified inall ministries according to programs and sub- programs, expected outputs, activities and inputs; and, as o f 2003, budget preparation has beenbased on sectoral strategy notes prepared by line ministries. Recent achievements inpublic expenditure management also include the adoption o f a medium- term economic framework linkingthe sectoral strategies to the budget, improvements to the cashmanagement system, and computerizationofbudgetpreparation andreporting. While an organic budget law (recently submitted to parliament) is expected to further strengthenbudgetary control andtransparency, significant capacitybuildinginline ministries and local government i s neededfor its implementation. B. MacroeconomicStability 9. Rwandahasbroadlymaintainedmacroeconomicstabilitysince reachingthe decisionpoint(Table 2). After experiencing stronggrowth and low-consumer price - 10- inflation over the period 1999-2002, economic performanceweakened inthe second half of 2003, with badweather leadingto a poor harvest for major crops and looser-than- expected fiscal and monetary policies causing inflationary pressures and an accelerated depreciation of the exchange rate. In2004, drivenbythe construction and services sectors, growth resumed andconsumer price inflation (excluding food and energy) was around a moderate 5 percent. The level o f centralbank reserves has continuously provideda comfortable cushion to absorb unexpected shocks. Table 2. Rwanda: Selected Economic and Financial Indicators, 1999-2004 1999 2000 2001 2002 2003 2004 GDP (percentage change) Real GDP growth 7.6 6.0 6.7 9.4 0.9 4.0 Consumer prices (end of period) 2.1 5.8 -0.2 6.2 7.7 10.2 Central govemment budget (percent of GDP) Total revenue (excluding grants) 9.9 9.7 11.4 12.2 13.5 13.9 Total expenditure and net lending 19.6 18.7 21.0 21.2 23.9 26.1 Domestic fiscal balance (excluding demobilization spending) -3.5 -2.3 -2.2 -3.8 -4.7 -5.3 Money and credit (percentagechange, end o fperiod) Domestic credit 12.8 0.7 0.3 -4.0 19.7 -22.6 Broad money 6.5 14.3 9.2 11.4 15.2 12.6 Extemaltrade (percentage change) Export volume 12.7 19.7 73.2 -10.0 -12.5 26.8 Import volume -5.3 -14.6 2.3 -6.3 1.1 4.6 Terms o f trade (deterioration -) -16.5 7.1 -37.9 -24.0 4.1 13.2 Balance o fpayments (percent of GDP) Current account balance (excluding official transfers) -16.9 -16.5 -15.9 -16.6 -19.2 -18.1 Gross reserves (in months of imports o f goods and services) 4.7 5.4 6.0 6.3 5.0 5.8 Sources: Rwandeseauthorities; and IMF and IDA staffestimates and projections. 10. The authorities,by and large, pursuedprudent macroeconomicpolicies apart fromtemporary slippagesinthe secondhalfof 2003. Domestic revenue, as well as grants, was significantly higher than projected at the decisionpoint.4At the same time, the domestic fiscal deficit gradually widened due to a strong increase in expenditure,which was largely spent on PRSP priorities. The remaining financing gap was filled bynew external concessional loans (slightly lower than anticipated at the decision point) and domestic borrowing that remainedbelow 0.5 percent o f GDP during 2000-04. Monetary and exchange rate policies were broadly geared to achieving the inflation andinternational reserves targets. However, inthe second halfo f 2003, policy Drivenby tax reforms (introduction o f a value-added tax in2001, income tax reforms in2003, and an overhaul o f the tax administration in2004), the revenue ratio increased gradually to about 14 percent of GDP in2004 from about 10percent in 1999. Grants were on average higher by 4.5 percent of GDP per year compared with the decision point projections. - 11- implementation weakened, with unprogrammed government outlays, including on elections, goods and services, as well as a large hotel p r ~ j e c t . ~ 11. While therewere slippages inthe programin the secondhalfof 2003, the implementationof the PRGF-supportedprogramthroughend-2003 andin the course of 2004 was broadlyon track. In2001,delays inreachingagreement on the 2002 budget and the medium-termfiscal framework ledto the expiration o f the previous ESAF/PRGF without disbursement o f the final tranche, and caused a temporary lapse in interim relief from the IMFunder the HIPC Initiative. However, a new PRGF arrangement was approved inAugust 2002 and the first review completed inJune 2003. The developments discussed inthe precedingparagraph ledto a delay inthe IMFBoard discussion o f the 2ndand 3rdreviews, which were completed inJune 2004. Since then, there has been considerable improvement inpolicy implementation, evidenced bythe staffs recommendation to complete the 4threview, based on an established six-month track record of successful policy implementation. C. StructuralReformsinthe Tea Sector 12. Progressinthe reformof the tea sector hasbeen satisfactory,although slower than anticipated. Steps have beentaken to redefine the government's role inthe tea sector, aimed at preparing the institutional fiamework to support a privatized tea industry.Inparticular, a law redefining the role o f OCIR-Th6, the government body regulating the tea sector, was passed in2003. Insteadofbeinginvolved inall aspects o f operation and finance, OCIR-The i s now providing extension activities to improve the capacity o f smallholders and facilitate their access to inputs.Most importantly, OCIR- Th6 no longer sets prices, which are now determinedbased on negotiated agreements with farmers' associations and representatives from the factories, andbeginning in2004, the government included a price premium for the quality o f tea harvested inorder to improve incentives to farmers. Moreover, OCIR-Th6 will gradually begin to focus on policy and strategy development, collection and dissemination o f market information, enforcing standards, andproviding incentives for improved tea quality and exports. 13. Althoughsubstantialprogresswas madetoward reformsinthe tea sector, the full privatizationoftwo tea factorieswas only partiallyconcluded;thus, the completionpointtrigger was not fully met.Boththe Pfunda andMulinditea factories were brought to the point o f sale.6However, a sales agreement was reached only with The financing o f a hotel project by the domestic banking sector contributed to a higher-than-programmed monetary expansion inthe second half o f 2003. Corresponding to the legal definition that was used under the tranche conditions for the Institutional Reform Credit. Specifically, "bring to the point o f sale" would be defined as having: (i) completed an evaluation o f the stocks o f Mulinditea factory, o n the basis, inter alia, o f an evaluation o f its assets and liabilities; (ii) prepared a prospectus for distribution to prospective buyers; (iii) offers for the solicited purchase o f share capital; (iv) evaluated any such offers and selected successful bidders; and (v) invited the successful bidders to enter into good faith negotiations. - 12- respect to Pfunda.For the Mulindifactory, the government and the investor could not reach an agreement, because the investor wanted to negotiate terms which went below the list price, to a level unacceptable to the government. Mulindiis to beputon the market again in2005, along with 4 other factories.' The government i s reviewing the privatization process and framework to inform the next round o f tea factory privatizations.8 D. SocialReforms 14. Rwandahas implementedallsocial sector reformtriggers for reachingthe completionpoint: e Inthe educationsector, netprimaryenrollment isnow at 95 percent, substantially above the target o f 73 percent, and nearly twice as manyteacher colleges were made operational as was required under the trigger. Moreover, the framework for community participation o fprimary andsecondary educationi s now operational and a sector-wide approach has been adopted for a framework to buildcapacity in the management o f education at the primary and secondary levels, including a regular stock-taking exercise conductedjointly bythe Ministryo f Education (MINEDUC), provincial and district authorities, donors, andparent-teacher association^.^ a Inthe healthsector, the government has succeededinstaffing andequipping a significantly higher percentage o f district health centers than required underthe completion point trigger (70 percent instead o f 50 percent). The Roll Back Malaria Strategic Plan for 2004-10 has been developed and adopted in collaborationwith donors; implementation is ongoing with goodprogress in providing subsidized treatment, supporting distribution o f impregnated bednets, and addressing drugresistance. Moreover, with immunization rates now at 96 percent according to official WHOAJNICEF data, progress has beenmade in reducingthe incidence o f communicable diseases, and the share o fbirths attended byqualified healthpersonnel has increasedby3 percentage points. Finally, the management and governance framework to support a dynamic health system based on NGOs anchored in grassroots activities and focused on co-financing with 'Aspart o fthe actions that were monitored under the World Bank's Institutional Reform Credit, the government's rationale for re-launching the bid for Mulindiwas consideredjustifiable and progress inthe sectorjudged satisfactory. The government will undertake a re-examination o fthe privatization ofPfunda andMulindi,designed as pilots for privatization inthe sector. Lessons leamed will informthe process for privatizing the remaining tea factories including Mulindi, scheduled for privatization in2005. The process to choose a firmthat will overseethe privatization process has already been initiated. Once a firmi s chosen, the bidding process for the secondphase will be launched inthe second half o f 2005. 9A revisedactionplanthat incorporates changes fromthe civil service reform related to teacher training, recruitment, deployment, and professional development i s scheduled to be adoptedby mid-2005. - 13 - strong community involvement has beenimplementedsuccessfully. Inparticular, to strengthen capacity, a new incentive package has been designed to entice staff to move to rural areas. Regarding the fight against HIV/AIDS, a multi-sectoral approach has been adopted and the availability o f essential drugs has been maintained at close to 90 percent o f all available essential drugs over the past few years due to community-managed revolving drug funds and an independentlymanaged central purchasing store. 0 A GenderAction Plan(2001-05), adopted byCabinet in2000, is under implementation, including disseminationo f information and sensitizationo f the government andNGOs. It has been complementedby a Comprehensive Gender Action Plan (adopted in2003) to eliminate gender disparities inthe legal framework. E. Reform Progress BeyondCompletion Point Triggers 15. Progress made with structural and social reforms over and above the completion point triggers is documented inthe Annual Progress Reports (APRs), as well as in a supplementary note to the second APR and addressed inthe Joint Staff Assessment (JSA) and a Joint Staff Advisory Note (JSAN) (Box 2). Particularly noteworthy was the progress inreestablishing the critical elements o f an effective state throughthe adoption o f anew Constitution inMay2003, followed bypresidential elections inAugust and legislative polls inSeptember-October. Moreover, substantial progress was made inaddressing governance issues, including by strengthening the office o f the Auditor General and overhauling tax policy and administration. Some o fthe reforms, notably the privatization o f a commercial bank, were also supported under the recent Institutional ReformCredit, which assessedprogress ingovernment's overall reform program as satisfactory. F. StaffAssessment 16. Inview of the strong performance inmostpolicy areas, particularly in education and health where the completion point triggers have been surpassed, and given the completion of the fourth review under the PRGFarrangement, the staffs recommend a waiver for the nonobservance of the completion point trigger related to reforms in the tea sector that has not been fully met. Inthe case of the privatization o f the Mulindifactory, the staffs assess that the authorities brought the factory in question to the point o f sale and their rejection o f the final bidwas on reasonable grounds. Moreover, the staffs welcome the authorities' commitment to privatize all remaining factories andbelievethat the review o f the privatization o f Pfunda and Mulindiwillresult inarevision of the privatization process to improve the prospects for a successful and rapidprivatization of the remaining factories. Also, other reforms inthe tea sector, notably the restructuring o f OCIR-ThC and redefinition o f its role, have been proceeding ina satisfactory manner, as also noted under the Institutional Reform Credit. - 14- Money and Banking Fiscal Policy and Management Introduction o f weekly foreign exchange auctions (2001) Computerization o ftax data management (2000) Fullaudits ofthree commercialbanks (2002) Introduction o fMedium-TermEconomic Framework First external audits of the National Bank o f Rwanda (2000) (2002) Introduction o f VAT (2001) Privatization o f two banks (2004) Revision of tax code (2002) Creation o f Large Taxpayer Department (2004) Trade Relations Privatization Entry into COMESA (2003) Establishment o f Private Sector Federation (2000) Adoption o fthe RevisedInternalTrade Act (2000) Liberalization o f telecommunications sector (2001) Private management of electric utility(2003) Establishment o fPublic Utilities Regulatory Agency (2002) 111. DELIVERY OF DEBTRELIEFAND LONG-TERM SUSTAINABILITY DEBT A. Reconciliation of Decision Point Debt Data 17. T h e reconciliation of debt data at end-1999 confirmed the amount of assistance under the enhanced HIPC Initiative approved at the time of the decision point (Table 8). To ensure the accuracy o fthe decisionpoint calculations, IDA and IMF staffs, together with the Rwandese authorities, have reviewed the data usedat the time." Revisions to debt and export data result ina decrease o fthe debt reduction needed to reach the 150percent HIPC threshold for the NPV o f debt-to-exports ratio from US$452.4 million inNPV terms to US$451.2 million, representing less than one percent of the targeted NPV o f debt after HIPC relief.'' Giventhe marginal net revision to the calculatedNPV o f debt, the staffs have left unchanged their assessment o f the required debt reliefunderthe HIPC Initiative at the decisionpoint, andthe ensuingcommon reduction factor.12The mainrevisions to the debt data were as follows: loInupdating the DSA, the staffs andthe authorities reconciled 95 percent ofthe nominal debt data as of end-1999 with creditor statements from all multilateral and Paris Club creditors and from most non-Paris Club official bilateral creditors. l1The three-year, backward looking average o f exports in 1999 was revisedupwardto US$122.7 million from US$121.2 million. l2Underthe 2002 information reporting framework inthe context ofthe HIPC Initiative(IDNSecM2002- 0133111/02), upward and downward adjustments o f less than one percentage point inthe targeted NPV o f debt after HIPC assistancedo not require a revisionofthe amount of assistancethat hadbeen calculated at the decisionpoint. For the PRGF-HIPC Trust Instrument(Section 111,paragraph3(b)), the provision that permits a downward revision o f HIPC assistance due to a recalculation o f the decision point DSA only applies to commitments made from March 15,2002 onward. - 15- e Multilateralcreditors.The NPV o fRwanda's multilateral debt to IFAD and BADEAwas revisedupwardbyUS$1.2 million andUS$1.4 million, respectively.l3 e Bilateralcreditors.The NPV o fRwanda's bilateral debt after delivery o f traditional debt reliefwas revised downward with respect to Austria upward with respect to Kuwait (US$4.5 million). 14, (US$l. 1million), Canada (US$1.2 million), and France (US$1.2 million), and 15 B. Statusof Creditor Participation 18. Creditorsaccountingfor 95 percentof totalHIPC Initiativedebt relief estimatedat the decisionpointhavegivensatisfactoryfinancingassurances for the provisionof their share of assistance.16 Multilateralcreditors 19. All of Rwanda's multilateralcreditorshave agreedto providetheir full share of assistance under the EnhancedHIPCInitiative.Debt relief from multilateral creditors amounts to US$396.5 million inNPV terms (87.6 percent of the total H P C debt relief). Interimreliefhas beenprovidedby all creditors with the exception ofthe International Fundfor Agricultural Development (IFAD),which has committed to provide its share of assistance once Rwandareaches the completion point (Table 9). e Assistance fromIDA. Debtrelief from IDA amounts to US$227.5 million in NPV terms. It is delivered through areduction of 88.4 percent of debt service falling due on disbursedand outstanding debt to IDA as o f end-1999, over the period2001 to 2020 (Table 10). Total nominal debt-service savings from IDA amount to US$404.7 million and interimassistance inthe amount o f US$56.5 million has been delivered through end-2004. l3The revision for IFAD was due to the correction for the use o f an inappropriate repayment profile to project debt service payments. Inthe case o f BADEA, a revision was warranted o n the basis o f updated information on the stock o f arrears consolidated inthe 1998 rescheduling agreement. l4Rwanda's debt vis-a-vis Austria, Canada, and France was revised downward because o f new information provided on the nominal stocks of debt. With respect to Kuwait, the debt was revised upward after correcting for the use o f an inappropriate interest rate at the decision point. l5Several European Union loans were incorrectly classified as multilateral at the decisionpoint. InFebruary 2005, the Commission of the European Union, after consultation with its member states, notified staffs that these loans should be classified as bilateral to reflect the correct ownership status they had since 1978. l6Inthis sectionof the document, any reference to financial assurances or delivery o fdebt reliefrefers to HIPC assistance approved at the decision point. - 16- Assistance fromthe IMF.EnhancedHIPC assistancefrom the IMF amounts to SDR 33.8 millioninNPV terms (equivalent to US$43.8 million). O fthis amount, the IMFhas already disbursedinterimassistanceo f SDR 14.45 millionas of end- 2004. The remainingIMF assistance(SDR 19.36 million) will be disbursedat the completion point, which i s projected to cover, on average, over 50 percent of Rwanda's principal repayments falling due to the IMF during2005-2010 (Table 11). Assistance fromthe AfDB Group.Debt relieffrom the AfDB amounts to US$75.0 million inNPV terms. Relief is beingprovided through an 80 percent reduction o f debt service falling due on debt outstanding and disbursed as o f end- 1999, until July 2025; total nominal debt-service savings will amount to US$144 million, o fwhich, US$20.1 million have been delivered through end- 2004. Assistance fromother multilaterals.Debt relieffrom BADEAamounts to US$21.1 million inNPV terms. Part o f BADEA's debt reliefhas been delivered through a concessional rescheduling o f arrears as o f end-1998 and the payments falling due in 1999 and2000. The EuropeanUnion i s expected to deliver a total relief o fUS$13.1 million inNPV terms. As o f end-2004, the EUhadprovided interimassistance inthenominal amount o fEUR4.2 millionthroughthe cancellation o f debt service that fell due on identified loans. The OPEC Fundis expectedto providerelief o fUS$4.7 million inNPV terms; interimreliefhas been provided inthe form o ftwo concessional loans that have already been disbursed." All o fthe above creditors willprovide the remainder o fassistance, when Rwanda reaches the completion point. Bilateralandcommercialcreditors" 20. ParisClub creditorshave agreedin principleto providetheir share of assistance underthe enhanced HIPC Initiative(US$34.8 millioninNPV terms). Interim assistance has beenprovided through a flow treatment under Cologne terms, as agreed on March 7,2002. Inthe corresponding agreedminute, participating Paris Club creditors declared their readiness inprinciple to provide their full share o f assistance through a stock-of-debt operation at the completion point, provided Rwandamaintained satisfactory relations with the participating creditor countries. Bilateral agreements have been signed with all Paris Club creditors with the exception o f France and Japan, with whom Rwandahas exchanged draft agreement^.'^ Most creditors have also indicated that l7The hnds from these loans were used to refinance outstanding arrears to the OPEC fund and to cover debt service payments to the OPEC Fund, on less concessional obligations, as they fall due. '*At the time o f the decision point, Rwanda had some outstanding obligations to commercial creditors. This debt was subsequently taken over by a Paris Club creditor. 19The deadline for conclusiono f bilateral agreements was extended to end-March 2005. - 17- they wouldprovide additional assistancebeyondHIPC relief(Table 12), estimated at about US$9.4 million inend-2003 NPV terms. 21. Non-Paris Club bilateral creditors are expectedto provide treatment comparable to that of the Paris Club, with assistanceunder the enhanced HIPC Initiative amounting to US$21.1 million inNPVterms. While none o fthese creditors has committed to provide assistance under the Initiative, some have already provided part o f their assumed share o ftraditional debt reliefs2'All non-Paris Club creditors are expected to provide their full shares o f traditional debt relief, as well as EnhancedHIPC assistance at the completion point. C. Updated Debt Sustainability Analysis Debt sustainability at end-2003 22. The DSA includedinthe decision point documentwas updatedjointly by the authorities and the staffs of the IMFand IDA, on the basis of end-2003 loan-by-loan debt data providedbythe authorities.2' The exchange rates and interest rates used inthe DSAarepresented inTable 13. 23. Based on a 98 percent reconciliation of the debt data," Rwanda's nominal stock of external debt reachedUS$1.6 billion at end-2003, compared with US$1.3 billion at end-1999 (Figure6 and Tables 8 and 14). O fthe total nominal debt at end-2003, 88.3 percent was owed to multilateral creditors. IDA remains Rwanda's largest creditor, accounting for 58.1 percent of total outstanding debt at end-2003. Bilateral debt amounted to US$183.7 million with US$88.9 million due to Paris Club creditors and the remainder to other creditors. With the exception o fUS$26.2 million, the entire stock of outstanding debt is official development assistance (ODA). 24. The NPV of Rwanda's external debt at end-2003, after full delivery of the assistancecommittedunder the HIPC Initiative at the decision point, is estimated at US$467.1 million, which is equivalent to 326 percent o f exports, compared with a decision point projection o f 193 percent. Taking into account the bilateral debt relief ~~ ~~~ 2o Libya has recently announced that it would not participate inthe Enhanced HIPC Initiative. The other bilateral non-Paris Club creditors provide debt relief o n a case-by-case basis. Regarding the provision o f debt reliefduring the interim period, the People's Republic o f China cancelled some o f its loans representingUS$14.2 million inNPV terms, and Kuwait and Saudi Arabia provided debt relief through a stock rescheduling of all remaining maturities and arrears under O D A terms, representing US$4.0 million and US$10.3 millionrespectively. The United Arab Emirates and Libya have not provided any debt relief so far. The debt simulations assume fullparticipation o f all creditors. 21 This refersto the public andpublicly guaranteed external debt outstanding and disbursed. 22 This corresponds to a full reconciliationo fmultilateral and an 83 percent reconciliationo fbilateral debt data at end-2003. - 1 8 - beyondHIPC Initiative assistance, the NPV o f debt i s further reduced to US$457.7 million; this still represents 320 percent o f exports-a ratio significantly above the 150percent threshold defined under the Enhanced HPC framework.23 Debtsustainabilityover the period2004-23 25. The long-termmacroeconomic framework for the DSA hasbeenrevisedto accountfor new developments since the decisionpoint (Box 3, and Tables 15 and 16). The most important changes compared with the original macroeconomic framework are as follows: a Economicgrowthwas reviseddownward from a flat 6 percent over thewhole projection period to gradually increase from 4 percent in2005 to 5.5 percent from 2011 onward. This revisionreflects the (more conservative) assumptionthat productivity increases resulting from government action to enhance productivity inagriculture, andmoregenerally inthe tradables sector, willberealizedwith a longer lag and to a lower extent than originally expected at the decisionpoint. a Exportprojections made at the decisionpoint were also revised downward from an annual average growth rate o f 11percent for goods and services (inU.S. dollar terms) over the period 2000-19 to a long-term rate o f 8 percent with an initial growth rate o f 9 percent during2005-13, to reflect the implementation of the export promotion strategy. These revisions mainlyreflect more conservative volume growth assumptions (reflecting slower-than-anticipated productivity gains for merchandise exports); inthe early years, growth is assumed to be driven mainlybythe coffee and tea sectors, inparticular through a shift toward higher quality products (green, flavored, and organic tea, as well as fully washed coffee). After production levels for these crops approach a steady state at around 2015 (approximated at the level o f the outturn inthe 1980s), further growth would be maintainedby a strongperformance o f nontraditional exports. a Externalfinancingmade available inthe form o fbothbudgetandproject support i s projectedto amount, on average, to 12.3 percent o f GDP during 2005-23, with a 17percent share coveredby concessional borrowing on standard IDA terms. The revisedmacroeconomic framework thus assumes a higher share o f fbture grant financing o f 83 percent both compared with the actual turnout inrecent years (an average grant share o f 67 percent over 2001-04) and the expected average share o f 80 percent at the decision point. This more positive outlook anticipates a prudent stance o f the Rwandese authorities with respect to the contracting o f new loans aimed at improving the country's sovereign debt outlook and an expected shift in creditor policies toward more grant financing for low-income countries. 23Section IV on topping-up considerations presents a detailed analysis of the factors which contributed to the increase inthe ratio. - 19- Box 3. Macroeconomic Assumptions Underlying the DebtSustainability Analysis at the Completion Point The baseline assumptions for the period 2004-23 are as follows: Real GDP growth is projected to increase gradually from 4 percent in2004 to reach 5% percent by 2011 as growth-enhancing sectoral strategies take effect and investment inhuman capital (health and education sectors) starts to pay off. Per capita GDP i s projected to increase gradually from 1.2 percent in2004 to reach 2.7 percent by 2011 as the population i s expected to grow by 2.7 percent on average between 2004- 23. Inflation i s projected to fall to 6 percent in2005 and stay at 4 percent from then onward. Exports o f goods and services would grow at about 9 percent until2013 inU.S. dollar terms as the export promotion strategy takes effect andthen stabilize at about 8 percent. Imports of goods and services would increase by 7 percent on average over the period 2005-23, mostly due to growing demand for capital good imports from the private sector. Central government tax revenue i s projected to increase gradually from 14percent o f GDP in2004 to 17 percent o f GDP by 2023. Noninterest expenditure is projected to increase from 25 percent o f GDP in2004 to a peak of 26% percent o f GDP by 2013 andthen gradually fall to about 24 percent o f GDP in2023 when the large government investments to improve infrastructure decline. The current account deficit (including grants) is projectedto remainbetween 5 to 9 percent ofGDP for the whole period. Excluding grants, it i s projected to gradually improve from 22 percent o f GDP in2005 to about 15 percent o f GDP in2015 and 10percent o f GDP in2023. Gross borrowing i s projected to be on average slightly over 2 percent o f GDP (about one percent o f GDP in2008-15 with an increaseto morethan 2 percent ofGDP by2023) while official grants are projectedto decrease gradually from about 12percent o f GDP over 2005-12 to 6 percent o f GDP by 2023. Thus, on average, more than three quarters o f extemal financing will be inthe form o f grants, but the share o f grants would decrease over time. e Gross domestic savings didnot pick up significantly since the decision point. However, giventhe importance o fhigher savings to reduce Rwanda's dependence on foreign capital flows to finance its investment needs, the framework now programs a gradual increase insavings, both inthe government and the private sector, from 2.3 percent o f GDP in2004 to 9.0 percent o f GDP in2023. In particular, private savings are expected to benefit significantly inthe next decade from reforms to stimulate the development of the financial sector, and create an enabling environment for the private sector. 26. Basedon the revised 400% , I400% macroeconomicframework,the Figure1 Rwanda ProjectedNPV of Debt-to-ExportsRatio, 2003-19 350% - . 350% staffs expect a substantial 300%- - 300% worseningin debt indicatorsover - the longtermcomparedwith the 250% - 250% decisionpointprojections 200% - G 200% (Tables 17-19 andFigure 1). This 150% - - 150% holdstrue notwithstandingthe 100%- . 100% -Completion p m t Decisionp m t 50%- - 50% 0% """"" " " ' 0% - 20 - ambitious assumptions regardingthe degree of grant financing. 0 The NPV of debt-to-exportsratio after enhancedHIPC assistance and additionalbilateraldebt reliefis expectedto remainabove the HIPC threshold,throughoutthe entireprojectionhorizon.From 320 percent at end- 2003, the ratio would peak at 337 percent in2004 before beginning a slow, gradual decline to reach 191percent in2020 and 170percent by 2023. Incontrast, at the time o f the decision point, the ratio was expected to drop below the 150 percent HIPC threshold in2008 andremain below that threshold throughout the projectionperiod. 0 Debt service as a shareof exportsis also expected to be substantiallylarger over the entireprojectionhorizon.While this ratio would be expected to remain below 12percent inany year, it would be, on average, almost twice as highas the decisionpoint projections. Moreover, Rwanda's debt service payments will rise significantly after 2020, when IDA'Sassistanceunder the enhanced HIPC Initiative assistancewould end: as a result, the debt service-to-exports ratio would increase to an average o f over 9 percent for the years 2021-23, and continue to rise thereafter. D. SensitivityAnalysis andLong-TermDebtSustainability 27. This section analyzesthe impactof three alternativescenarios that could determineRwanda's debt sustainabilityprospects:an extemal shock inthe form o fa deterioration inthe terms o f trade; a significant decline ingrant financing; and a higher growth outlook, broadly in line with the authorities' baseline underlyingtheir PRSP document (Table 20 and Figures 7 and 8). The first two scenarios illustrate the impact o f potential risks to Rwanda's debt sustainability, while the last scenario suggests that higher growth, triggered byproductivity gains, could result inan improvement indebt indicators, ifaccompanied bybuoyant fiscal revenue. All scenarios clearly indicate that strengtheningexport performance i s critical for achieving extemal debt ~ustainability.~~ Scenario 1: Terms oftrade shock 28. This scenarioillustratesRwanda's highvulnerability to changes in commodityprices anditsdependence on importsfor publicinvestmentby simulatinga sharp drop of exportprices anda simultaneousimportpriceincrease. Merchandise export prices inUS.dollar terms would drop by 25 percent relative to the baseline in2005 and thereafter increase at the same rates as inthe baseline (by an average 2 percent per annum). The magnitude o f the shock is comparable to recent history: in 1998,2001, and 2002, Rwanda's export prices also dropped bymore than 20 percent, 24These results are corroboratedby a DSA conducted underthe new framework for low-income countries (Appendix 2). According to this DSA, Rwanda's NPV o f debt-to-exports ratio after enhanced HIPC Initiative assistanceand additional bilateral debt relief at end-2003 stood at 286 percent. The ratio would fall below 200 percent only by 2012, and reach 142 percent by 2023. - 21 - mainly driven by a decline incoffee prices and, for 2001 and 2002, coltan. The simulation further assumes that the sharpprice decline would leadto a 2 percentagepointreduction inexport volume growth during2005-07, beforevolume growthrecovers to therates assumed inthe baseline. Moreover, there would be a simultaneous increase inimport prices by 10 percent in2005, which thereafter would grow at the baseline rates. The resultingbalance-of-payments financing gap would be filled by a mix o f budgetary loans and grants, similar to the one proposed under the baseline scenario. 29. Under such scenario, Rwanda's debt situation would substantially worsen. As a result o fthe lower export prices, total exports inU.S. dollar terms would fall, on average, by 15 percent per annumrelative to the baseline scenario. Drivenby the drop in exports and the additional new borrowing requiredto fill the gap, the NPV o f debt-to- exports ratio would peak at 383 percent in2007, exceeding the baseline projections by 59 percentage points. Afterwards, the ratio would begin a slow decline, reaching 218 percent in2023. At the same time, the debt service-to-exports ratio would worsen by about 1-2 percentage points compared with the baseline. Scenario 2: Reduction of external grants 30. This scenario illustrates the sensitivity of Rwanda's debt outlook to a discontinuation of sizeable external support in the form of grants as assumed under the baseline. The "shock" i s assumedto reduce the grant component ingross central government financing to 55 percent duringthe projectionperiod from 83 percent inthe ba~eline.~'The assumption o f 55 percent i s only slightly lower than the lowest share o f grant financing observed inthe interimperiod (60 percent in2002). The outlook for the other macroeconomic aggregates i s left unchanged. 31. Such a grant "shock" would cause Rwanda's external debt situation to remain unsustainable throughout the projection horizon. The NPV o f debt-to- exports ratio would rapidly increase to a peak o f 391 percent in2010 and then remain withina range of about 350-400 percent through 2023. Inaddition, servicingRwanda's debt obligations would require an increasingshare o fthe country's foreign exchange earnings, as evidenced by a worsening o fthe debt service-to-exports ratio, which would rise to 16 percent during 2021-23. Scenario 3: Higher GDP growth 32. The third scenario analyzes the impact of higher GDP growth on Rwanda's debt sustainability. It assumes that the real GDP growth rate will exceed, on average, the baseline assumption by 1.5 percentage points over 2005-23. The higher growth path would be driven by stronger export performance, while additional import volume growth 25 Off-budget grants that are channeled directly to subordinate government levels or NGO-financed projects are assumed to remain constant. - 22 - wouldbe limitedto 0.7 percentage points per year relative to the baseline. Spendingas a share o f GDP would bekept constant, while the broadening o f the tax base and efficiency gains would increase revenue by 1.5 percent per year beyond the nominal GDP growth. The higher revenue performance (as a share of GDP)would lower the external financing needand, assuming the same grant-loan mix as inthe baseline scenario, a 17percent share o fthe total savings would be usedto reduce loan financing. 33. The lower borrowingrequirementtogether with strengthened export performance would cause debt indicators to improve over the longer term. The NPV o fdebt-to exports ratio, after enhancedH P C Initiative assistance and additional bilateral reliefwould fall below the HIPC threshold of 150percent in2022 andreach 134percent in2023, while the debt service-to-exports ratio would slightly fall relative to the baseline scenario. This scenario thus shows that strong growth canreduce the country's debt burden, inparticular ifsupported by a prudent fiscal strategy and a strong development o fthe export sector. However, this would require domestic revenue to grow faster than real GDP andadditional measures to strengthen revenue administration andbroadenthe tax basewould likelybe needed. Itwould also require export earnings, which today cover only about one-third o f the import bill, to grow faster than imports and thus swift implementationo f the export promotion strategy. Moreover, it i s important to note that the scenario assumes higher growth would come from efficiency gains (or an increase in total factor productivity) rather than an increase ininvestmentor labor supply, which, basedon experienceinother countries, is difficult to achieve. Summary 34. The three scenarios suggest that a high and sustained levelof grant financing, strong export growth, and a focus on further revenue mobilizationare key to improvingRwanda's debt situation. This calls for a continued strong commitment to buildon progress made since the decisionpoint instrengtheningthe regulatory environment and infrastructure for private business inRwanda, as well as implementing the export promotion strategy to lay the basis for strong, export-oriented growth. Further progress inrevenue administration and, with a view to increasing the efficiency o f spending, public expenditure management will also be needed. But even with strong future policyimplementation, animprovement inthe NPV o fdebt-to- exports ratio will require significant external support inthe form o f grants. IV. CONSIDERATIONOFA TOPPING-UP OF ENHANCED HIPCINITIATIVEASSISTANCE 35. Inthe event of a deterioration of the debt indicators at the completion point beyond the HIPC thresholds, the enhanced HIPC Initiative framework allows for additionaldebt relief at the completion point ("topping-up") "if the deterioration in the member's debt sustainability is primarily attributable to a fundamental change - 23 - inthe country's economic circumstances due to exogenous factors."26 Additional debtreliefmaythenbeprovidedto bringthe NPV of debt-to-exports ratio down to 150 percent at the completion point. 36. With an NPV of debt-to-exports ratio reaching320 percent at end-2003 after additional voluntary relief from bilateral creditors, Rwanda warrants consideration for additional HIPC debt relief. This section presents the case for topping-up by discussing the nature and the cause for the deterioration inthe country's debt sustainability prospects. First, a decomposition of the change inthe NPV o f debt-to- exports ratio i s presented. However, as this decomposition captures only part o fthe economic developments since the decisionpoint, developments inimport prices, which do not directly affect the key HIPC debt indicators, but still influence Rwanda's ability to carry debt, are then considered. A. Decomposition of the Increaseinthe NPV of Debt-to-Exports Ratio 37. The NPV of debt-to-exports ratio at end-2003 morethan doubled compared with the HIPC threshold to 320 percent (assuming additional voluntary bilateral debt relief) due to several factors. Projections at the decisionpoint anticipatedan increase inthe NPV of debt-to-exports ratio from 150percent at end-1999 to 193 percent at end-2003, largely owing to the impact o f new borrowing. However, projected growth inexport earnings was expected to dampen the increase intheratio. Infact, the actual ratio at end-2003 exceeded the anticipated ratio by 127percentage points due to unanticipated developments. 38. A decomposition of the variation inthe NPV of debt-to-exports ratio identifies four factors that had an important influence on the NPV of debt-to- exports ratio (Table 3):27 a newborrowing; a changes incross-currency exchange rates, especially between the euro and the U.S. dollar; a export earnings; and a a lower discount rate. These factors are discussed inturnbelow. 26See Box 1 ("Enhanced HIPC Initiative-Completion Point Considerations" EBS/01/14 1 and IDA/SECM2001-0539/1, 8/21/2001). See also the discussion in"Draft Amendmentto the PRGF-HIPC Trust Instrument" (EBS/04/43, 3/18/04). 27The net impact of other factors (including additional bilateral debt relief, and amortization and debt relief operations affecting the end-1999 debt stock) results ina minor increase o f about three percentage point, - 24 - New borrowing 39. At the decision point,it was projectedthat the volume of new borrowing alone would cause an increaseof 92 percentagepointsinthe ratio.Although high, the decision point document justified this increase onthe basis that national savings rates, inboth the government and the private sector, would increase only gradually (EBS/00/265, paragraphs 33-34). Therefore, significant levels o fnewborrowing were neededto finance investments to stimulate growth and exports, giventhat the assumed share o f grant financing was already above the historical trend. 40. In fact, Rwandaborrowedless than projectedat the decisionpoint. Disbursement volumes stayed well below the level anticipated at the decisionpoint, leading to a lessening of the impact o fnewborrowing on the debt ratio by 10percentage points.28However, newborrowing was less concessional than expected (it should be noted inthis context that it i s difficult to project the concessionality o f new borrowing, because it depends on the volume and mix o f funding from donors that offer resources at differing interest rates and maturities). Also, projections at the decisionpoint for new borrowing mistakenly usedthe relatively higher U.S. dollar discount rate insteado f the SDR discount rate to calculate theNPV o fSDR-denominatednew borrowing.29These factors ledto a substantial underestimationo f the decisionpoint's projections o f the future NPV of debt. Exchangeratechanges 41. Unanticipatedchangesin exchange rates,which are exogenous, ledto a deteriorationof 22 percentagepointsinRwanda's NPV of debt-to-exportsratio (Table 13). The impact of such changes i s significant as about three-quarters o f Rwanda's nominal debt at end-2003 was denominated in SDR and Euros, currencies that appreciated substantially against the US.dollar (Table 4). On the other hand, most of Rwanda's export receipts are denominated inU.S. dollars. Thus, the higher debt stock anddebt service costs inUS.dollar terms represent an additionalburden, which constitutes a fundamental change inRwanda's economic circumstances. 28One-third o f the disbursements made inthe interim period was o n existing commitments as of end-1999. 29The SDR discount rate shouldhave been used instead of the U.S. dollar discount rate, because most of the projected new borrowing was denominated inSDRs. The SDR discount rate at the time o f the decision point was 5.59 percent, compared with a U.S. dollar discount rate o f 7.04 percent. Consequently, the NPV o f new borrowing for 2003 was substantially underestimated. - 25 - Table 3. Rwanda:Breakdown of the Increase o fNF'V o fDebt-to-Exports Ratio From 150 Percent at End-1999 to 320 Percent at End-2003 (Inpercent, unless otherwise indicated) Anticipated increase Unanticipated increase Total increase Con@ibuthgfactors to the changes inthe NPV ofdebt-to. (Inpercent) (Percentage of (Inpercent) (Percentage of (Inpercent) (Percentage of exports ratio total) total) total) End-1999 NPV of debt-to-exports ratio 150.0 11 150.0 11 End-2003 NPV of debt-to-exports ratio 193.2 21 1. Changes inparameters 0.0 0.0 80.6 63.6 80.6 47.5 Discountrates 0.0 0.0 59.1 46.6 59.1 34.8 Exchange rates 0.0 0.0 21.6 17.0 21.6 12.7 2. New borrowing 67.5 156.6 28.5 22.5 96.0 56.5 Volume 91.8 212.8 -10.1 -8.0 81.6 48.1 Concessionality -24.2 -56.2 38.6 30.5 14.4 8.5 IDA terms 31 0.0 0.0 14.4 11.4 14.4 8.5 Correction 41 -24.2 -56.2 24.2 19.1 0.0 0.0 3. Additional bilateral debt relief 0.0 0.0 -6.6 -5.2 -6.6 -3.9 4. Exports -39.4 -91.3 28.6 22.6 -10.7 -6.3 Changes inexports of goods -19.4 -44.9 22.5 17.7 3.1 1.8 Changes involumes -35.7 -82.8 -27.9 -22.0 -63.6 -37.4 Changes inprices 16.4 37.9 50.3 39.7 66.7 39.3 Changes inexports ofnonfactor services -20.0 -46.3 6.2 4.9 -13.8 -8.1 5. Other 51 15.0 34.7 -4.5 -3.5 10.5 6.2 End-2003 NPV of debt-to-exports ratio 193.2 21 319.9 61 319.9 61 Memorandumitem: Actual end-2003 NPV of debt-to-exports ratio after full delivery 326.5 of Enhanced HIPC relief Source: IDA and IMF staff estimates. 11NPV of debt-to-exports ratio after full delivery o f HIPC assistance as estimated at the decision point. 21NPV o f debt-to-exports ratio after full delivery of HIPC assistanceas projected at the decision point. 31At the decision point, new borrowing was assumedto be on standard IDA terms. However, new borrowing was less concessional than expected. 41Refers mostly to the incorrect use, at the decision point, of the US.dollar discount rate for the estimate o f the NPV o f new borrowing. 51Including amortization and debt relief operations affecting the end-1999 debt stock and differences on the delivery o f HIPC debt relief during the interim period compared to the decision point projections. 61Actual NPV o f debt-to-exports ratio after full delivery of HIPC assistanceand additionalbilateral debt relief. - 26 - Table 4. Rwanda: Structure o f External Debt by Currency Denomination (Inpercent o ftotal) Nominal Value N e t Present Value 2003 2003 Total 100.0 100.0 Special Drawing Rights 62.3 59.3 United States Dollar 15.5 16.0 Euro 12.2 13.2 Japanese Yen 2.9 3.9 Kuwaiti Dinar 2.0 1.7 Saudi Arabian Ryal 1.9 1.9 Chinese Yuan 1.9 2.7 Others 1.2 1.3 Sources: IDA and IMF staff estimates. Exportperformance 42. The growthin export earnings loweredthe NPV of debt-to-exportsratioby almost 11percentagepointsbetweenthe decisionandthe completionpoints,but the contributionfell short of the level originallyprojecteddue entirely to a deterioration in export prices,which is an exogenousand fundamentalfactor. Exportgrowth was muchlower thanprojectedat the decisionpoint. This reflectedvolume growth above decision point projections, but much lower-than-expectedexport prices. (Figure 2). However, this \ 6 2- \ -----_____--. - - 1 -- * -.. 1 . 14 2 strong overall performance -Total mschmdkecxporu masks an unexpected and TCS temporary shift inthe 0 6 1999 2000 2001 2002 2003 composition o f Rwanda's export base, as strong coltan exports benefited from the boom inthe telecommunications industryin2001 and 2002 and more than compensated for the poor performance of the traditional export sectors. In particular, coffee volumes remained substantiallybelow 1999 levels inthree out o f the four consecutive years. Inthis context, and given that the coltan boom was a short-lived phenomenon, developments since the decision point clearly indicate - 27 - the export sector's vulnerability to weak coffee and, to a lesser extent, tea harvests (Box 4). decision point. This was Figure 3 Rwanda Percentage Denation of ExportPnces from Decision Point mostly due to an Projechons, 1999-2003 0 4- - 0 4 unexpected continuation o f e . , I price (US$0.74) was about halfofthe price projected -Total 4.4- - merchandisecqom s ~ o f c c at the decision point. . " Tea Together with declining I 4 6 prices for coltan (after the peak in2000) and nontraditional exports, this ledto a zoo0 2001 2002 2003 39 percent deviation from decision point projections inthe (moving) price index for merchandise exports at end-2003, despite stronger-than-expected tea prices. 0 Exports of nonfactor services improved the NPV of debt-to exports ratio by almost 14 percentage points, somewhat less than the improvement anticipated at the decision point. These developments reflectedmainly the performance o f the tourism sector, the expansiono fwhich i s likely to have been affectedby instability inthe Great Lakes region (see Box 4). Discount rate changes 43. The fall inworld interest rates, which is exogenous to Rwanda, played a substantial role in the deterioration of Rwanda's debt burden indicators (Table 13). The unexpected decline indiscount rates betweenthe decision and completionpoints contributed about one-third of the total change inthe NPV o f debt-to-exports ratio and almost halfo fthe unanticipatedchange. 44. All else remaining equal, a decline indiscount rates would be associated with a fundamental deterioration inRwanda's economic circumstances through a reduction in its future export earnings. Theoretically, a lower interest rate on industrializedcountries' benchmark bonds (usedas the discount rate for HIPC calculations) reflects market expectations o f a lower rate o f inflation or a lower real - 28 - Box 4. Factors Underlying Rwanda's Export Performance While the authorities could have pursued more aggressive policies to support the export sector, a combination of factors appears to have been at play to explain the poor performance of some traditional export sectors relative to decision point projections. Inparticular, it was difficult at the decision point to anticipate the effects o f climatic conditions and other shocks as well as the implications o f structural problems-for instance, poor infrastructure; hghtransportation costs; electricity shortages; low capacity inproduction, processing and marketing; and insufficient access to capital (the last two factors partly reflect the destruction o f humanand physical capital duringthe genocide). Given the importance o fraising export growth for external debt sustainability, strengthened efforts are now under way, including to diversify the export base." Inparticular, the results o f an IntegratedTrade Diagnostic Study, and ajoint staff Financial Sector Assessment and Action Plan will informthe implementation o f the government's export promotion strategy. 0 Inthe coffee sector a large share o fthe grower populationlacks critical skills andthe size o fproduction units is small while coffee trees have not been rejuvenated, resulting ina gradual decline inbean quality and quantitye2Inaddition, production levels have been negatively affected by unfavorable rains, particularly in2003, The authorities have started to tackle these weaknesses by encouraging diversification toward higher-priced fully washed coffee. 0 After recovering to pre-genocide levels by 1997, tea volumes remained at the same level through 2003, as productivity remained low and tea quality poor and volatile. The low productivity o f the state-owned tea estates due to a lack o f investment compared with that o f a private factory indicate that privatization o f the remaining tea factories should help redress this problem. 0 While nontraditionalexports (including hides and skins, pyrethrum, and cassiterite) increased, these products have not yet reached a critical mass to significantly diversify the export base as these industries are relatively new and dominated by small-scale and capital- constrained firms. Additional hotel capacity and improved infrastructure have helped boost tourism, but receipts fell short o f expectations at the decision point, largely due to the poor integration o f Rwanda's tourism sector with regional markets, as well as instability inthe region. To address these problems the authorities are moving toward increasedregional integrationand are identifying actions to enhance the sector's performance under the export promotion strategy. On average, coffee and tea exports accounted for over halfo ftotal merchandise export earnings during 1999-2003. Coffee export volumes remain substantially below pre-genocide levels with annual exports averaging 17,300 tons over the period 1999-2003 compared with an average o f 35,300 tons during 1984-89. See also SMl041332, "Rwanda's Coffee Exports: Past Experience and Lessons for the Future." - 29 - interest rate, which i s normally associated with lower levels o f economic a~tivity.~'Both events can be expected to lower Rwanda's export earnings through lower future prices as well as volumes. Empirically, the effect o f a change indiscount rates cannot be easily isolated from the many other factors that affect a country's export outlook, including supplyand demand shifts inworld commodity markets.Nevertheless, despite the likely presence o f other factors, a note to the IMFBoard on the informational content o f the CIRR discount rate (FO/Dis/04/25,03/18/04) found a statistically significant impact of interest rate changes on the export outlook o fHIPC countries. Inparticular, for Rwanda, a r- 100basis point reduction inindustrial country interest rates inthe past was associated with a 6 percent fall inthe country's export prices over a subsequent five-year horizon.31,32 45. Looking forward, Rwanda's current export price outlook is clearly worse 1 than anticipated at the 140, ,140 decision point. Comparing Figure4. Rwanda: Changein Export PricesSinceDecision Point, export priceprojections through (Moving PriceIndices for MerchandiseExports, 2000=100) - IZo /,, 2006 made at the decision point 1~~ with those at the completion __------------ 100 point clearly shows a 80 deterioration inthe outlook. This i s illustrated inFigure 4, which i - 6o 60 also compares the export price - Decisionpoint indices o fthe decision and 40 - - `DP, adjusted Complehonpoint 40 completion points with a third 2o . index. This index i s constructed 30 Recent analysis suggests that these two factors largely explain the fluctuations inlong-term interest rates and, for the case o f the US, their contribution i s roughly the same (Claudio Raddatz: "Changes inInterest Rates and the DebtBurdeno f HIPCs," World Bankmimeo). 3` Such a correlation, however, is not reproduced inother specifications using export values instead o f prices as the dependentvariable, which couldbe due to the fact that the data included the genocide period during which export volumes dropped substantially. 32 The effect ofa discount rate decline on a country's economic circumstances could also be gauged by analyzing changes inthe N P V o f debt-to-NPV o f exports ratio. The discount rate change would affect this ratio through changesinthe present value inboth the numerator and denominator, allowing the discounted value o f hture export earnings to be taken into account. The NPV o f debt over NPV o f exports ratio at end- 2003 more than doubles from 11percent estimated at the decisionpoint to 25 percent estimated at the completionpoint, reflecting the impact o fthe total change inprojected export values (which, inprinciple, captures the indirect impact o f lower discount rates as well as other factors). (For this analysis, the data series for the decision point were extended using assumptions comparable to completion point projections from 2007 onward, since the decision point databaseincludes prices and volume projections only through 2006.) - 30 - Figure 5 International Coffee and Tea Prices, 1995-2015 to-one relationship betweenthe to0- -.. Coffee, arabica .100 discount rates and Rwanda's export 50- Tea 50 0 0 B. Other ConsiderationsAffectingRwanda's EconomicCircumstances 46. One other factor that is likelyto have an impacton Rwanda's debt-servicing capacity goingforward, is the unanticipatedsharp increasein importedenergy pricesbetweenthe decision andcompletionpoints.At the decisionpoint, import prices were expected to increase by 12percent between 1999 and 2006. By contrast, the completionpoint projections envisage a much stronger increase o f 29 percent over the same period, with a particularly steep rise in2004 due to higher energy prices. These changes affecting Rwanda's repayment capacity do not appear inthe decomposition table, but are as material andrelevant as a decline inexport prices. Moreover, forecasts suggest that energy prices are also expected to remain at relatively highlevels (incomparison to forecasts at the decisionpoint in2000). This implies that, other things equal, a higher share o f export receipts would be required for the financing o f imports rather than the repayment o f debt and suggeststhat the added burden on servicing debt canbe expected to remain over the mediumto long term. C. StaffAssessment 47. Reviewingall evidence availableand after full examinationof Rwanda's economic situation,the staffs are of the view that the substantialdeteriorationin 33The decline inthe discount rate is assumedentirely to reflect lower global inflation expectations. 34According to the Intemational Coffee Organization, coffee demand increased by 1.5 percent inthe last couple o f years while production rose at an averagerate of 3.6 percent, as a result o fnew plantations in Brazil and Colombia and the rapid expansion o fproductioninVietnam (although the latter involves Robusta, while Rwandaproduces Arabica). - 31 - Rwanda's NPV of debt-to-exports ratio between the decision and completion points i s primarily attributable to fundamental changes in the country's economic circumstances due to exogenous factors. Lower export prices, changes incross- currency exchange rates, and a lower-than-expected concessionality o f new borrowing were all unambiguously exogenous and outside the control o f the authorities. Moreover, staffs have presented additional analysis establishing the lower discount rates as an exogenous and fundamental factor causing a deteriorationinRwanda's NPV o f debt-to- exports ratio. All these factors account for more than 50 percent o fboththe unanticipated and the total increase o fthe ratio and thus provide sufficient justification for topping-up o f debt relief at the completion point. The contribution o f highvolumes o f new borrowing cannot be considered exogenous, but it i s critical to note that the volume through end-2003 in fact remainedbelow the levels anticipated at the time o f the decision point and one-thirdwas related to existingprojects. Inaddition, the unanticipatedworsening of import prices compared with decision point projections can be expected to have a lastingnegative impact on Rwanda's terms o f trade and, consequently, its capacity to repay its debt. Taken together, and inline with the topping-up methodology approved by the Boards of IDA and the IMF, the staffs consider that Rwanda's case meets the requirementsfor topping-up at the completion point. 48. Staffs therefore recommend that additional HIPC Initiative relief be granted to bring Rwanda's NPV of debt-to-exports ratio from 320 percent at end-2003 (after additional voluntary bilateral debt relief) down to the HIPC Initiative threshold of 150 percent. This recommendation i s further supported by the observation that the authorities (i) remain committed to reforms exemplified by continued improvements inthe implementation o fpolicies; (ii) have borrowed prudently despite Rwandabeingadversely affectedby external shocks, including a deterioration inits terms o f trade; and (iii) taking measures to improve export performance, in are particular, by initiating the implementation o ftheir export promotion strategy. Onthe basis o f the updated DSA, a topping-up o fUS$243.1 million o f HIPC Initiative assistance inNPV terms at the completion point would be needed to achieve the required reduction. 49. With topping-up, Rwanda's externaldebt situation would improve considerably over the projection period, freeing up resources to be used for additional PRSP-relatedspending. Under the baseline scenario for new lendingfrom IDA andother concessional sources, the NPV o f debt-to-exports ratio is projected to rise from 150percent in2003 to 200 percent in2007; the ratio i s then projected to fall to 150percent in2014 andremain around this level for the following 10 years. At the same time, the debt service-to-exports ratio is estimated to fall to 4 percent by2011and stay between 4 and 5 percent for the rest o f the projection period.35 35 These projections assume that grants will comprise 83 percent of financing. - 32 - V. CONCLUSIONS 50. The staffs of the IMFand IDA are of the view that Rwanda's performance with respect to the conditions for reachingthe completion point under the enhanced HIPC Initiative has beensatisfactory. The full PRSP was prepared and implementedsatisfactorily, the PRGF-supported programhas had atrack record o fmore than six months, and key structuralreforms and social measures have been implemented. Given the overall strong progress instructural reforms and the policy commitments made with regard to the privatization o f tea estates, the staffs recommendthat a waiver o fthe completion point trigger on the tea sector be granted. 51. Inlight of the above, the staffs of the IMFand IDA recommendthat the ExecutiveDirectors determine that Rwanda has reached the completion point under the Enhanced HIPC Initiative framework and that additional assistance beyondthat already committed at the decision point inthe amount of US$243.1 million inNPV terms be granted to lower Rwanda's NPV of debt-to- exports ratio at end-2003 to 150 percent. The additional assistance o f the IMFwould be disbursedwhen other creditors provide satisfactory assuranceso ftheir participation in this exceptional effort. Once satisfactory assuranceshavebeenreceived, IMF staffwill return to the IMFBoardwith a proposed decision approving the disbursement o f the IMF's share ofthe additional relief. VI. ISSUES FORDISCUSSION Staffs seek guidance from Directors on the following points: D o Directors agree that Rwandahas met the conditions for reaching the completionpoint at this time? @ D o Directors agree that Rwanda's poverty reduction strategy and expenditure- tracking systemprovide a satisfactory basis for ensuring that enhanced HIPC Initiative assistance and other resources will continue to promote poverty reduction? D o Directors agree that satisfactory assurances have been given byRwanda's other creditors to commit enhanced HIPC Initiative resources to Rwanda, as approved at the decision point, on an irrevocable basis? D o Directors agree that the deterioration inRwanda's debt sustainability i s primarily attributable to a fundamental change inits economic circumstances due to exogenous factors? Ifso, do Directors agreethat exceptionaladditionalHIPC Initiative assistance be granted to lower Rwanda's NPV of debt-to-exports ratio at end-2003 to 150percent? - 33 - e Ifso, doDirectors agreethat this additionalassistancewouldbegranted when the Boards decide that other creditors provide sufficient assurances to participate inthis exceptional effort? - 34 - Figure6. Rwanda:CompositionofExternalDebt 11 (Inmillions ofU.S. dollars) end-199921 Other multilateralcreditors AfDB 8.0% 11.9% Pans Club IDA 54.9% end-200331 AfDB 16 2% Other multilateral creditors Club IDA 58.1% Source: Rwandese authorities; and IDA and IMFstaff estimates and projections. 11NPV of debt after the application o ftraditional debt reliefmechanisms. 21At end-1999 discount and exchange rates. 31At end-2003 discount and exchange rates. - 35 - Figure 7. Rwanda: Extemal Debt and Debt Service Indicators for Medium-and Long-Term Public Sector Debt, 2003-23 (Inpercent) NPV of ExtemalDebt-to-Exports 700 -After traditional debt-relief mechanisms 600 -After enhanced HIPC assistance _ _ _ + -After bilateral debt reliefbeyond HIPC assistance 500 -------After possible topping-up Assistance at the Completion Point 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Debt Service-to-Exports 35 -After traditional debt-relief mechanisms -Alter enhanced HIPC assistance _.._- After bilateral debt reliefbeyond HIPC assistance -After possible topping-up Assistance at the Completion Point 0 ' 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sources: Rwandese authorities; and IDA and IMF staff estimates and projections. - 3 6 - Figure 8. Rwanda: SensitivityAnalysis, 2003-23 (Inpercent) NPV of ExternalDebt-to-Exports 500 400 ..._...._..---*- _..-.-........__. ..-.-.-.. .. e . 300 ----- 200 -- Baseline _I Terms of trade shock 100 ....-Lower grants -Higher growth 0 003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Debt Service-to-Exports 20 -Baseline --Termsof trade shock .....Lowergrants 15 -Higher growth I O 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sources: Rwandese authorities; and IDA and IMF staff estimates and projections. - 37 - Table 5. Rwanda: SelectedSocial andDemographic Indicators Latest Single Year SameRegiodlncomeGroup 1970-75 1980-85 1995-2001 Population Totalpopulation,midyear (millions) 4.4 6.1 7.9 673.9 2505.9 Growthrate (percentage; annualaverage for pe, 3.3 3.5 2.9 2.5 1.9 Urbanpopulation(percentageofpopulation) 4.0 5.0 15.2 32.3 30.8 Total fertility rate(births per woman) 8.4 7.7 5.9 5.1 3.5 Income GNIpercapita(US$) 100.0 270.0 240.0 460.0 430.0 Consumerprice index (1995=100) 13.0 30.6 133.9 Foodpriceindex (1995=100) 39.5 162.2 Incomeiconsumptiondistribution Shareof incomeor consumption Gini index 28.9 Lowestquintile (percentageof incomeor consum] 9.7 Highestquintile (percentaeof incomeor consump 39.1 ... Social indicators Public expenditure Health(percentageof GDP) 5.5 2.5 1.1 Education(percentageof GDP) 3.4 2.8 Netprimary school enrollmentrate (percentageof age group) Total 59.8 96.1 Male 61.1 96.8 Female 58.5 95.4 52.0 ... Access to an improvedwater source (percentageofpopulation) Total 58.1 76.1 Urban 82.7 90.2 Rural 46.4 70.1 Immunizationrate (percentageunder 12months) Meas1es 52.0 69.0 57.8 59.8 DPT 50.0 77.0 52.9 61.5 Childmalnutrition(percentageunder 5 years) 24.3 Life expectancyatbirth (years) Total 44.8 47.5 39.9 46.2 58.9 Male 43.2 45.8 39.5 45.4 57.9 Female 46.4 49.3 40.4 47.0 60.0 Mortality Infant(per 1,000 livebirths) 124.0 130.0 118.0 105.4 80.4 Under 5 (per 1,000 live births) 209.0 219.0 203.0 170.6 120.6 Adult (15-59) Male(per 1,000 population) 502.2 502.6 667.0 519.9 311.9 Female (per 1,000 population) 402.7 408.6 599.0 461.3 255.7 Births attendedby skilledhealthstaff(percentage 31.3 Source: World Bank World DevelopmentIndicators. - 38 - Table 6. Rwanda: SelectedEconomic and Financial Indicators, 2000-08 2000 2001 2002 2003 2004 2005 2006 2007 2008 Projections (Annual percentagechange, unlessothenvise indicated) National income and prices GDP at constant prices 6.0 6.7 9.4 0.9 4.0 4.0 4.3 4.5 4.7 GDP deflator 3.3 0.2 0.0 8.7 12.0 6.4 4.0 4.0 4.0 Consumer price index Annual average 3.9 3.4 2.0 7.4 12.0 7.0 4.0 4.0 4.0 End of period 5.8 -0.2 6.2 7.7 10.2 6.0 4.0 4.0 4.0 Extemal sector Exports, f.0.b. 44.7 4.2 -28.1 -6.3 54.3 -8.3 7.1 7.1 10.2 Imports, f.0.b -3.6 -0.8 -1.3 4.0 12.5 28.1 5.7 4.4 5.2 Export volume 19.7 73.2 -10.0 -12.5 26.8 -5.6 5.8 6.2 8.3 Import volume -14.6 2.3 -6.3 1.1 4.6 25.9 6.0 4.3 4.6 Terms o f trade (deterioration -) 7.1 -37.9 -24.0 4.1 13.2 -4.5 1.5 0.7 1.1 Nominal effective exchange rate (depreciation -) -13.0 -1.8 -15.6 -23.0 -1.4 Real effective exchange rate (depreciation -) -10.5 -3.5 -12.3 -19.1 7.1 Grossofficial reserves(inmonths o fimports) 5.4 6.0 6.3 5.0 5.8 4.8 4.8 4.8 4.4 Government finances Total revenue 35.9 8.3 7.9 22.3 39.7 10.2 10.1 5.5 15.8 Total expenditure and net lending 4.2 20.0 10.5 23.7 27.5 12.9 12.5 7.1 8.1 Ofwhich: Current expenditure 3.7 20.4 14.0 31.4 4.7 19.0 7.0 7.3 8.9 Capital expenditure 2.9 19.1 -18.6 25.5 75.6 15.7 23.8 6.9 6.9 Money and credit Domestic credit 0.7 0.3 -4.0 19.7 -22.6 14.9 Credit to the govemment (net) -9.6 -5.1 -12.4 10.7 -28.8 8.2 Credit to the economy 10.3 5.4 8.5 9.0 6.1 6.7 Net domestic assets -6.8 -2.6 -6.1 14.8 -31.9 23.7 Money and quasi money 14.3 9.2 11.4 15.2 12.6 5.4 ... Interest rate (money market, inpercent; end ofperiod) 11.6 10.2 9.0 9.4 9.6 ... (Inpercent ofGDP, unlessotherwise indicated) Government finances Total revenue 19.4 19.6 19.4 21.6 25.9 25.8 26.2 25.4 27.1 Total expenditure andnet lending 18.7 21.0 21.2 23.9 26.1 26.7 27.7 27.3 27.1 Ofwhich: Current expenditure 12.6 14.2 14.8 17.8 16.0 17.2 17.0 16.7 16.7 Capital expenditure 6.0 6.6 4.9 5.6 8.5 8.9 10.2 10.0 9.8 Domestic fiscal balance (excluding demobilization) -2.3 -2.2 -3.8 -4.7 -5.3 -4.5 -5.9 -5.9 -5.6 Overall balance (before grants) -8.9 -9.5 -8.9 -10.3 -12.2 -12.7 -13.6 -13.0 -12.6 Gross investment 17.5 18.4 16.9 18.4 20.5 21.0 22.3 22.3 22.2 Gross domestic savings 1.3 2.6 0.0 -0.8 2.3 -1.3 1.4 2.2 2.9 Extemal current account balance Excluding grants for budgetary assistance -16.5 -15.9 -16.6 -19.2 -18.1 -21.9 -20.4 -19.4 -18.5 Including grants for budgetary assistance -5.0 -5.9 -6.7 -7.8 -3.0 -9.0 -7.0 -7.2 -5.8 Extemal public debt (end of period) 75.0 79.3 80.6 88.4 88.8 73.1 70.3 68.0 63.6 Debt service after HIPC Initiative (inpercent of Exports of goods and services 14.1 12.0 11.1 9.7 7.9 8.6 10.2 11.1 Government revenue 11.4 7.5 6.8 7.2 5.1 5.6 6.7 6.2 (Inmillions ofU.S. dollars) GDP at current market prices 1,794 1,704 1,732 1,684 1,835 2,057 2.209 2,353 2,512 Government paymentsarrears (reduction -) Domestic -1.9 -15.0 -3.9 -1.0 -17.1 -6.5 -7.0 -7.0 0.0 Extemal 7.1 -37.8 4.6 -22.6 1.3 -6.6 0.0 0.0 0.0 Overall balance ofpayments -3.8 22.9 18.2 -33.6 87.7 -58.9 16.8 13.5 -3.1 Sources:Rwandeseauthorities; and IMF staffestimatesand projections. - 39 - Table 7. Rwanda: Observance o f Quantitative and Structural PerformanceCriteria andBenchmarks under the PRGF Arrangements 2001-04 11 2001 2002 2003 2004 Mar Dec 21 Dec June Dec June QuantitativePerformanceCriteria Net foreign assets of the NBR Met Met Met Met Not met Met Net domestic assets of the banking system Met Not met Reserve money 31 Met Not met Met Met Not met Met Net credit to the central govemment by the banking system Met Met Met Met Not met Met Domestic fiscal balance Not met Not met Not met Met Primary fiscal balance Met Met Social spending Met Priority spending Met Met Met Met Not met Exceptional spending Met Met Met Net accumulation of domestic arrears Met Met Not met Not met Not met Met New nonconcessional external debt Met Met Met Not met Not met Met Short-term external debt Met Met Met Met Met Met Continuousquantitativeperformancecriteria Stock o f outstanding nonreschedulable external arrears Not met Met Not met Met Not met Not met Indicativetargets Broadmoney 41 Not met Met Not met Met - 40 - Table 7. Rwanda: Observanceof Quantitative and Structural PerformanceCriteria and Benchmarksunder the PRGF Arrangements 2001-04 l / (continued) Test Date Status Structural performance criteria Begincollecting taxes under VAT law January 1,2001 Met Ensurethat the National Bank of Rwandaconducts weekly End-January2001 Notmet auctionsto sell foreign exchange to the highest bidder among the commercial banks at whatever rate clear sthe auction Enact a budget for 2003 January 1,2003 Met Complete a comprehensivereview of all tax exonerations, End-June2003 Met exemptions,andincentives under tax laws and investment agreements; and remove andlor modify such special treatment Preparefinancial instructionsin order to promote effective End-July 2003 Met expenditurecontrol Submit revisedinvestment code to parliament repealing indirect End-December2003 Notmet and direct tax provisions of the code Issue financial instructions in order to promoteeffective End-January 2004 Not met expenditure control Incorporation of tax incentives into the structureof the income tax End-March 2004 Not met Submit revised2004 budget to parliament End-June2004 Sot met StructuralBenchmarks Develop a system for monitoring poverty-relatedexpenditures January 1,2001 Met on amonthlybasis Preparea monitorable action plan for further strengthening End-February 2001 Met the Auditor General'sOffice, and a strategyand timetable for delivering a full audit ofpublic accountsannually Complete audits of the large companies' 1998 tax returns and End-March 2001 Met complete40 audits of 1999returns Finalize restructuring plans for a specifiedcommercial bank End-September2002 Met consistentwith understandingswith IMF staff Startpublishing statisticsof government financial operations End-October 2002 Met following the GovernmentFinance Statisticsformat on a quarterly basis Incorporate any extrabudgetaryand off-budgetprojects and End-December2002 Sot met transactionsidentifiedby the recent stocktaking exercise into the budgetto the extent appropriate Develop and implement amechanism to ensure that all borrowing End-December2002 Notmet by district governments i s reported to the central government on a monthly basis To improve the managementof the large volume of nonperforming Tendersto be awarded Notmet loans, commissiona comprehensivefinancial sector study, no later than 7131102 together with the World Bank Conduct full audits of three banks End-December 2002 Met -41 - Table 7. Rwanda: Observance of Quantitative and Structural Performance Criteria and Benchmarks under the PRGF Arrangements 2001-04 I/ (concluded) Test Date Status Ensure that the NBR the MoF, the Ministry of Justice, and the End-December 2002 Not met Bankers' Association willjointly prepare an action plan to improve the legal environment to facilitate stronger loan recovery Complete the report on implementation of the 2002 development End-June 2003 Not met budget Issue the tender for the sale of Rwanda Commercial Bank End-June 2003 Not met Issue list of overdue obligations scheduled for clearance in 2003 End-June 2003 Not met Establish witten procedures to ensure the monetary data End-August 2003 Not met used for program purposes are in accordance with T M U Issue action plan for the closure of dormant accounts and End-September 2003 Met accounts operating outside of controlling regulations Implement a monthly reporting mechanism for the financial End-September 2003 Not met operations of all districts Submit Organic Law to parliament End-September 2003 Not met Operationalize the NBR's Internal Audit Department End-December 2003 Met External audit firm to complete the audit of the NBR's 2003 End-June 2004 Not met financial statements Finalization of action plans for bringing banks into full End-June 2004 Not met compliance with banking regulations by 12131104 Cabinet approval for export promotion action plan End-September 2004 Met Source: I M F staff assessment. 11There have been changes in the program design during 2000-04. Three reviews (December 2002 and June and December 2003) had a performance criterion on exceptional spending. Moreover, several PCs were changed -- the performance criterion on net domestic assets was replacedby a performance criterion on reserve money; the performance criterion on the primary fiscal balance was replaced by a performance criterion on the domestic fiscal balance; - the performance criterion on social spending was replacedby a performance criterion on priority spending; 2/ The review was not completed as a result of delays in reaching agreement on the 2002 budget and the medium-termframework. 31Until2001 indicative target; from 2002 onward performance criterion. 41Became indicative target in 2002. - 42 - Table 8. Rwanda:Nominal andNet PresentValue o fExternalDebt Outstandingat End-1999" (InmillionsofU.S.dollars) NominalDebt NPV of DebtAfter TraditionalDebtRelief21 As estimatedat Revisedat the As estimatedat Revisedat the decisionpoint completionpoint decisionpoint completionpoint Total 1,261.2 1,259.7 634.2 635.3 Multilateralinstitutions 1,093.5 1,093.0 555.8 557.4 IDA 691.1 691.4 318.9 319.2 AfDB Group 225.2 225.4 105.1 104.7 IMF 75.9 75.9 61.4 61.0 BADEA 33.4 33.5 29.6 31.0 IFAD 31.9 31.9 15.2 16.4 EU/EIB 28.2 28.2 18.4 18.4 OPECFund 6.7 6.7 6.6 6.6 EEC-IDAadministered31 1.2 0.0 0.6 0.0 Official bilateralcreditors 167.2 165.9 77.8 77.7 Parisclub 31 73.0 71.2 48.5 44.6 Pre-cutoffdate 73.0 72.0 48.5 44.9 ODA 53.3 51.1 34.9 33.7 Non-ODA 19.7 20.8 13.5 11.1 Post-cutoffdate 0.0 0.0 0.0 0.0 ODA 0.0 0.0 0.0 0.0 Non-ODA 0.0 0.0 0.0 0.0 Austria 9.3 8.7 2.9 1.8 Belgium 0.0 0.0 0.0 0.0 Canada 3.0 3.3 2.5 1.3 Denmark 0.0 0.0 0.0 0.0 France 45.0 45.0 29.7 28.5 Germany 0.0 0.4 0.0 0.1 Ireland 0.0 0.0 0.0 0.0 Italy 0.0 0.1 0.0 0.0 Japan 15.2 12.6 12.9 12.6 Luxembourg 0.0 0.0 0.0 0.0 Netherlands 0.0 0.1 0.0 0.0 UnitedKingdom 0.0 0.4 0.0 0.1 UnitedStates 0.6 0.6 0.5 0.2 Non-PansClub 94.1 94.7 29.4 33.0 People'sRepublic of China 32.0 32.3 5.5 5.6 Kuwait 29.4 29.6 10.6 15.1 Libya 1.o 1.o 0.5 0.3 SaudiArabia 30.0 30.0 11.4 11.4 UnitedArab Emirates 1.8 1.8 1.2 0.6 Commercialloans 0.5 0.8 0.6 0.3 Memorandumitem: PansClubcutoffdate is December31, 1994 Sources:Rwandeseauthorities;andIDA andJMF staffeshmates. 1/Refersto publicandpubliclygaranteedexternaldebt. 2/ After full use oftraditionaldebt-reliefmechanism, andcomparabletreatmentfromnon9aris Club creditors. 31SeveralEuropeanUnionloanswere incorrectlyclassified as multilateralat the decisionpoint. InFebruary2005, the Commissionof the European Union,after consultationwith its member states, notifiedstaffsthat these loansshouldbe classifiedas bilateralto reflectthe correct ownershipstatus they hadsince 1978. - 43 - Table 9. Rwanda:Status of CreditorParticipationfor HIPCAssistanceas Approvedat the DecisionPoint IDA 227 5 50 3 Ye8 Astidancevi11 be delwered lhmughB reduction of88 4 percent oflhe debt benice f a h g due to IDA on dnbuned and oufnandmg debfssofend-1999.overtheperiod2001-2020 infpnmreLefmthearmuntofUSS565~Uianmno~oaltenrrhhasbeenpmvlded 84 ofend-2004 ToYl naminaldeb1senice savingswlll munt I o USS404 7 mliion A6wanDwelopmnt BanVFund 75 0 166 Asiidmce will be delivered ihmvgh B reductionof80 pertentoflhe debt-sewice p ~ p n rto tho AIDE Omup over tha period2000- s (AIDB) 2025 on Be dirbwed and outsfanding debt 88 ofend- December 1999 htenmhsslsfan~em the munl ofUSS20 Id i m has been pmnded betreen 2001 and end-200b Total nominaldebt J I N ~ savings %ill to USSl44 rmlhon munf w 43 8 9 7 Assilmce vi11 be delii'ered thmugh p n B fmm the PRGFMIPC Tmsl Fund uhicb WU puiially E O Y ~ the pm01paIp a p n t s falling due on Rv;anda'eautslandmg obligalianna l h the Fundas afeodJAcember 20W htenmsirislan~einthe munt of SDR14 45 mllmninnominalf e m hss t e n provided m the years 2001 to 2004 EwooeanUnion 13 I 2 9 Yes TheEvmpanUnion haspmvldedintenms~~stan~ethmughlheEan~ellstionofd~blumo. fabgduemthemIrrLnpodon identified loans The @talm u n f ofint- hssisfance pmvlded was ELR4 2 mllmn mnamnal t e m as ofend-2004 At he completmnpant.the iemndsr ofthe total asibtsnce uillbeprovided m the form ofa 100pemnf canceUatlonof ~peoifieloans Arab Bank for Ewnom~Developmot 21 I 4 7 YO8 mA h a (BADEA) lnfemstionalFundfor Agmvlfural 108 2 4 Yea Dere1oprrent (FAD) OPEC Fund for intamational 4 7 1 0 Yes Esfmted wistsnce ofUSS3 4 mihony1hPV f e m WQ pmilded Uvoughlwo oonoarrional loans The iemumesofthe loans w s Developmnt used10 refmanoethe a"outsfanding founds the OPEC Fund andto covero-nt " n t ~ e s on debt to the OPEC Fund The remainmgasrisuce wll be pmvlded at the wmplel~onpaint Total Mullilaferal 396.0 875 Interim hs~~stanccbeingpmvided h v g h Cologne flow', andBOW crediton have EmEeUed 100% of flow dung the mfenm is PansClub Creditao 35 3 7 8 YE8 p a d Tha nmk of deb1opemionunderC d q " f m (W percent m SQV redmiion)18 expected at the c~mpletim pmf NonPansClubCrediton 21 I 4 7 People's Republic ofChma 4 11 0 9 The Peopie'a RIpublw ofChma has provided debt reliefon B bilated basis underther oun ! e m They have akady cancelled m I O hovember2001 eo_ ofRuanddsobligationsutiichrepresenteda mbitantd shpveoffradiiiansl debt relief K W d 7 6 1 7 h2003,Kuuaithaspmildeddebfreii~ffhm~gh~sl~~kre~~hed~lingunderGDAtem~uhichwunfedaspanafthelrassvmd KO ahax oftadifma1 debt relief Libp 0 4 0 1 K O Saudi Arabia 8 2 I 8 KO Saudi Arabiahas debt relief on a brlatcml basis under their onn! e m lhey pmvidsd debt reschedulingopratian underODA B f e m m 2001, s,hhloh counted as pan aftheir as-d s h m oftraditional debt relief Uniled ATsbEmiretEa 0 9 0 2 K O Total Bilateral andCommlsl 56.5 12.5 TOTAL 452.4 100.0 - 44 - - 45 - * V I m0 -g N - w - e - w y - I C . I C . 0 3 ).-ha N - - N n -5 e e r-CI5 - * - -N3* Y _ I C . =VI c c, lCn- h X - m m - 'cion I ! ! I - 46 - I I . I - PI o o H o o o o o 0 0 0 0 0 0 0 ' 2 - 47 - E a, Y cd -0 5 i- .e t= e, 0 Ea, * cd 2* a, wx -0 5 2a, Y B x W - 49 - I - 5 0 - - 51 - . - N CI - 52 - - 53 - - 54 - - 55 - m - m 9 e IC) - 0 80' " 9 9 " IC) 0 -m 2 m e a: Q m N Y N e h - 56 - Table 22. HIPC Initiative: Status of Country Cases Considered Under the Initiative, February 11, 2005 Target Estimated Total NPV of Debt-to- Assistance Levels 11 Percentage Nominal Debt Decision Completion Gov. (Inmillionsof U.S. dollars, presentvalue) Reduction Service Relief country Point Point Exports revenue Multi- World inNF'V of (Inmillions of (inpercent) Total Bilateral lateral I M F Bank Debt 21 U.S. dollars) Completion point reachedunder enhanced framework Benin Jul. 00 Mar. 03 150 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 194 2,060 originalframework Sep. 97 Sep. 98 225 448 157 291 29 54 14 760 enhancedframework Feb. 00 Jun. 01 150 854 268 585 55 140 30 1,300 Burkina Faso 553 83 469 57 23 1 930 originalframework Sep. 97 Jul. 00 205 229 32 196 22 91 27 400 enhancedframework Jul. 00 Apr. 02 150 195 35 161 22 79 30 300 topping-up Apr. 02 150 129 16 112 14 61 24 230 Ethiopia 1,982 637 1,315 60 832 3,275 enhancedframework Nov. 01 Apr. 04 150 1,275 482 763 34 463 47 1,941 topping-up Apr. 04 150 707 155 552 26 369 31 1,334 Ghana Feb. 02 Jul. 04 144 250 2,186 1,084 1,102 112 781 56 3,500 Guyana 591 223 367 75 68 1,354 originalframework Dec. 97 Muy 99 107 280 256 91 165 35 27 24 634 enhancedframework Nov. 00 Dec-03 I50 250 335 132 202 40 41 40 719 Madagascar Dec. 00 Oct-04 150 836 474 362 19 252 40 1,900 Mali 539 169 370 59 185 895 originolframework Sep. 98 Sep. 00 200 121 37 84 14 43 9 220 enhuncedframework Sep. 00 Mar. 03 150 417 132 285 45 143 29 675 ,Mauritania Feb. 00 Jun. 02 137 250 622 261 361 47 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4,300 originalfrumework Apr. 98 Jun. 99 200 1.717 1,076 641 125 381 63 3,700 enhancedframework Apr. 00 Sep. 01 150 306 194 112 18 62 27 600 Nicaragua Dec. 00 Jan. 04 150 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhancedframework Dec. 00 Apr. 04 I50 521 211 309 28 170 53 944 topping-up Apr. 04 150 143 23 119 14 70 25 246 Senegal Jun. 00 Apr. 04 133 250 488 212 276 45 124 19 850 Tanzania Apr. 00 Nov. 01 150 2,026 1,006 1,020 120 695 54 3,000 Uganda 1,003 183 820 160 517 1,950 originalframework Apr. 97 Apr. 98 202 347 73 274 69 160 20 650 enhancedframework Feb. 00 May 00 150 656 110 546 91 357 37 1.300 Decision point reachedunder enhancedftamework Cameroon Oct. 00 Floating 150 1,260 874 324 37 179 27 2,800 Chad May. 01 Floating 150 170 35 134 18 68 30 260 Congo, Democratic Rep. of Jul. 03 Floating 150 6,311 3,837 2,474 472 831 80 10,389 Gambia, The Dec. 00 Floating 150 67 17 49 2 22 27 90 Guinea Dec. 00 Floating 150 545 215 328 31 152 32 800 Guinea-Bissau Dec. 00 Floating 150 416 212 204 12 93 85 790 Honduras Jul. 00 Floating 1I O 250 556 215 340 30 98 18 900 Malawi Dec. 00 Floating 150 643 163 480 30 331 44 1,000 Rwanda Dec. 00 Floating 150 452 56 397 44 228 71 810 Sao Tome and Principe Dec. 00 Floating 150 97 29 68 24 83 200 Sierra Leone Mar. 02 Floating 150 600 205 354 123 122 80 950 Zambia Dec. 00 Floating 150 2,499 1,168 1,331 602 493 63 3,850 Decision point reachedunder original framework C6te dlvoire Mar. 98 31 141 280 345 163 182 23 91 6 41 800 Total assistance providedicommitted 32,002 15,541 16,325 2,532 51 7,577 54,093 Preliminary HIPC document issued Burundi ... 150 801 120 68 1 24 414 92 1,313 C6te dlvoire 61 ... 91 250 2,569 1,027 918 166 438 37 3,900 Sources: IMF and World Bank Board decisions, completion point documents, decision point documents, preliminary HIK documents, and staff calculations. 11 Assistance levels are at countries' respective decision or completion points, as applicable. 21 Inpercent of the net present value of debt at the decision or completion point (as applicable), after the full use oftraditionaldebt-relief mechanisms. 3/ CBte dlvoire reachedits decision point under the original framework inMarch 1998. The total amount of assistancecommitted thereunder was US$345 million in1 NPV tem 41 Nonreschedulable debt to non-Paris Club ofiicial bilateral creditors and the London Club, which was already subject to a highlyconcessional restructuring, i s excluded from the NPVof debt at the completion point inthe calculation of this ratio. 51 Equivalent to SDR 1,718 million at an SDRWSD exchange rate of 0.6635, as of February 11,2005. 61 It is suggestedthat enhancedHIPC relief for Cdte d'lvoire overtake the commitments made under the original HIPC framework. - 57 - APPENDIX I PublicDebtManagement 1. The responsibilityfor publicdebt managementis sharedamong different bodieswithin the governmentof Rwanda. The Public DebtDivision (DPP) at the MinistryofFinance (MINECOFIN) maintains the debt databaseandis responsible for ensuring the servicing o f extemal obligations. Actual payments are made bythe "Dkpartement Inspection du Change et Balance de Paiements" at the National Bank o f Rwanda (NBR). Other divisions inthe MINECOFIN are concerned with negotiating and contracting public external debt and granting public guarantees. The Central Projects and External Finance Bureau(CEPEX), a semi-autonomous body inthe MINECOFIN, i s tasked with coordinating extemal financing activities by line ministries, by sector priority and by donor. 2. The "Sous-ComitCde Gestionde la Dette"is in charge of the coordination betweenthese different agencies. Its effectiveness, however, is hamperedbythe absence o f a legal mandate and the irregularity o f its coordination meetings. As a result, the Committee is not able to effectively channel or facilitate the flow of information. Inthis regard, it i s necessary to empower it with an explicit and clear legal mandate.36 3. Rwanda's legalframeworkfor debt managementwould also needto be strengthenedto placestronger emphasis on publicdisclosureof bothpublicdebt managementpoliciesand reportson publicdebt. A. PolicyCoordinationandDebt Strategy 4. The main responsibilityfor decisions regardingnew borrowingis with the MINECOFIN. The contracting o fnew loans and grantingo f guarantees is the responsibility o f the MINECOFIN, subject to parliamentary approval. Inthe process, MINECOFIN seeks technical advice from its own debt office andthe NBRregarding the terms of the new loans and from CEPEX on the allocation o f new financing to priority sectors. Only to a lesser extent do decisions on new borrowing take into account the impact o f additional loans on the medium-and long-term macroeconomic outlook. 5. Evaluationsof new borrowingare done mainlyin the contextof their compliancewith the concessionalityrequirementsset out in the PRGF arrangement. Underthe current PRGFarrangement, new borrowing is strictly limitedto loans with a 36Such amandate could include (a) coordination o f debt management activities; (b) establishment o f a channel for aregular andreliable flow o f information; (c) formulation and follow up o f the country's debt strategy; (d) periodical analysis o fthe debt management framework and proposals for its improvement; (e) technical analysis o f new borrowing proposals, including a recommendationto the Minister o fFinance; and (9 elaboration o f a disclosure policy, aiming at enhancing the accountability o f the agencies participating inthe debt management process bymaking the debt policy and its results public. - 58 - APPENDIX I grant element o f 50 percent or more. This policy applies to the contracting and guaranteeing ofnew long-termborrowing bythe central government, local governments, and the NBR. B. DataRecordingand Reporting 6. Two institutions record debt data in Rwanda, the MINECOFIN and the NBR. The DDP at MINECOFINrecords externalcentralgovernment debt. Inparallel, the NBRalso recordsdebt data, butwith amore comprehensive coverage. For example, domestic debt i s solely recorded at the NBR.By means o f a questionnaire that i s sent out on a regular basis, the NBR also maintains a database on public enterprise andpublicly guaranteed external private debt. 7. The quality of debt data recording could beenhanced by improved access to debt documentation and the installationina network of a debt recording software. Fairly good documentation on public sector debt i s maintained inboth institutions; however, weak archiving practices make any data reconciliation efforts unnecessarily cumbersome. Only the MINECOFIN i s usingUNCTAD's database system DMFAS 5.2 (DMFAS was first installed in 1990 andthe last update to version 5.2. took place in November 2000). Staff has beentrained inthe use o f DMFAS at the MINECOFINbut many trained staff have left the ministrysince. Inparallel, the NBRmaintains its own database inan excel environment. An interface between the two institutions i s lacking and a reconciliation o f the two databases is time intensive and therefore only carried out on an irregular basis. It is based mainlyon informal efforts by staffs o fboth institutions. 8. Inconsistencies betweenthe two datasets has led, and could lead, to discrepancies betweendebt data inthe budget and inthe balance of payments. The DDPprovides debt statistics for the budget; on the other hand, debt statistics includedin the balance o fpayments originate from the NBR.Despitethe reconciliation efforts bythe two institutions, consistency o f numbersacross government publications could not be ensured inthe past. Effective reconciliation and management o fthe databases inthe MINECOFINandNBRwill be critical inorder to ensure reliable debt data. C. Analytical Capacity and Staffing 9. There i s a need to build the capacity of staff on all aspects of debt management, ranging from interpretation of loan agreements and reports sent by creditors to the use of the debt recording system and formulation of DSAs. Some training has beenprovidedby Debt Relief International andUNCTAD. However, awareness o f debt restructuring options and sustainability issues i s limited to a few individuals.Further technical assistance aiming to ensure a wider dispersion o f debt management skills throughout the staff, and to assist inintegrating debt simulations with macroeconomic projections, shouldbe a priority. 10. Inaddition, the numberof staff with sufficienttraining to carry out even basic debt management functions seems inadequate. Since 1998, the DDP has - 59 - APPENDIX I experienced a significant reduction inthe number o f staff: from 8 staff in 1998 it shrank to only 3 in2004. As a result, carrying out the functions of the DDP (as outlined inthe "Cadre organique duministbre de finances") represents a challenge. Going forward, it will be vital for the government to attract and retain into its debtmanagement team skilledpersonnel. - 60 - APPENDIX II Debt SustainabilityAnalysisfor Low-IncomeCountriesFramework 1. The IDA andthe IMFhaveproposeda forward-lookingframeworkfor debt sustainabilityfor low-incomecountries(LIC framework).37 This appendix presents the projected path o fRwanda's debt burden indicators under the LIC framework methodology and draws some conclusions on the forward-looking sustainability o f the country's sovereign extemal debt. 2. The resultsunderthe baselinescenario indicatethat, even after full delivery of HIPC assistance and additionalbilateraldebt relief,Rwandafaces a highrisk of debt distress(see Appendix I1Table 1).Usingthe LIC framework, Rwanda's NPV o f debt as o f end-2003, after full delivery o fH P C assistance and additional bilateral debt relief,38i s estimated at US$398 million, equivalent to 286 percent o f exports.39Inthe following years, the NPV of debt-to-exports ratio i s projectedto increase andpeak at 267 percent in2007. Thereafter, it falls gradually to reachthe 137percent by 2024 (see Appendix I1Figure 1).The NPV o f external debt-to-GDP ratio follows a similar pattem: from 24 percent at end-2003, the ratio increases to 25 percent by end-2007, and thendecreasesgraduallyto about 16percent bythe endo fthe analysis period. Finally, the extemal debt service representing about 11percent o f export revenue in2003 decreases gradually to levels around 6-7 percent until2020, after which it increases sharplyabove 9 percent as concessional debt comes to maturity and debt service reduction under the HIPC Initiative i s exhausted. An overall assessment would point out that, even ifliquidity indicators suggest that a distress situation i s a distant concem, they do not provide sufficient comfort against the highlevel o f the exports-based stock indicator. 3. When comparedwith Rwanda'shistoricalperformance,it becomesclear that bothan increasedrelianceon grant financingandthe success of the export promotionstrategy are key to realize the projectionsin the baselinescenario.The proposedL I C framework suggests an alternative scenario inwhich the main parameters that determine the debt dynamics are assumed to remain at their historical average^.^' This "historical scenario" is intendedto provide an indication about how optimistic the 37!lDebt Sustainability inLow-Income Countries: Proposal for an Operational Framework and Policy Implications" (SMl04127 and 1DA/SECM2004/0035,2/312004)and "Debt Sustainability inLow-Income Countries: Further considerations o n an operational framework and policy implications" (SMl0413 18 and IDAiSECM200410629, 911012004). 38 Unless otherwise indicated, all debt ratios inthis section assume full delivery o f HIPC assistance (as approved at the decision point) and bilateral debt reliefbeyond HIPC. 39 This compares to 320 percent under the HIPC methodology. Appendix I1Box 1,presents the methodological differences between the HIPC framework and the LIC framework inthe calculation o f the NPVo fdebt-to-exports ratio, as well as the impact o fsuch differences on the ratio. 40 Under this scenario, real GDP growth, inflation, the noninterest current account inpercent o f GDP, and non-debt-creating flows inpercent o f GDP are assumed to remain at their ten-year historic averages, - 61 - APPENDIX I1 baseline i s relative to the country's own past performance. As shown inthe Appendix II Figure 1, all debt burdenindicators under the "historical scenario" present a significant deterioration compared to the baseline. Inparticular, the debt service-to-exports ratio exhibits an upward trendand bythe end o fthe projectionperiod, it would reach 61 percent, morethan 6 times the levelprojectedunder the baseline. The significant deterioration o f debt and debt service indicators under the "historical scenario" underlines the critical importance o frealizing the ambitious export growth projections under the baseline interms o f exports performance and grant financing.41 4. Other stress tests give further evidenceto Rwanda'svulnerabilityto adverse developments.Rwanda's debt indicators experience a considerable deterioration under most o f the stress tests proposed under the LIC framework (see Appendix 11Table 2). In particular, the debt service-to-exports ratio i s significantly affected when all main parameters determining the debt dynamics are assumed to be one-half standard deviation below their respective historical averages during the period 2005-06. Under this scenario, which represents a 25 percent probability o f occurrence, the debt service-to-exports ratio i s projectedto be twice as highby 2014 as inthe baseline case. 5. In summary,the projectedpathofthe NPV of debt-to-exportsratiounder the baselinesignals a highriskof debt distressdespitelow levels of the debt service- to-exports ratio.Such a situation calls for increasedreliance on grant financing with prudentnewborrowing only on highlyconcessional terms. Inthis context, donors and creditors will needto coordinate carefully to ensure that extenial financing to support Rwanda's development goals i s provided on terms compatible with longer-term debt sustainability. Equally important, the government needs to swiftly proceedwith the implementation of its export promotion strategy, with a view to strengthenRwanda's repayment capacity and reduce its vulnerability to shocks. 4' Inthis context, itis important to note that even the optimisticbaseline assumptions for export growth do not fully reflect the ambitious quantitative objective's set inthe authorities' strategies for the coffee, tea, and tourism sectors. - 62 - APPENDIX 11 B o x 1. Impact o f the use o f the LIC framework methodology on the end-2003 NF'V o f debt-to-exports ratio Usingthe new LIC framework methodology, Rwanda's NPV o f debt-to-exports ratio is estimatedto have reached 286 percent at end-2003. This i s 34 percentage points lower compared with the 320 percent obtained usingthe HIPC methodology. The increase is due to three factors: (i)a3percentagepointsdecreaseisduetothechangeintheexchangeratesusedtocalculatethe projected debt service streams: projected exchange rates (from WEO) under the LIC framework versus end-2003 exchange rates under the HIPC methodology; (ii)a38percentagepointsdecreaseisexplainedbythechangeinthediscountrateused to calculate the NPV o f debt: a single (5 percent) discount rate under the LIC framework versus currency-specific discount rates under the HIPC methodology; and, (iii)a7percentagepointsincreaseisduetothechangeinthedenominatorusedtocalculate the ratio: current exports under the LIC framework versus a three-year backward-looking average under the HIPC framework. Table 1. Rwanda: Decompositionof the decrease inthe NPV of debt-to-exportsratio at end-2003 11 (inpercentagepoints,unlessotherwiseindicated) Factors explaining the change in the NPV of debt-to-exportsratio Impactof methodological changes Total Change -34.3 Ofwhich: due to changes in: Exchangerates -3.2 Discountrates -38.3 Exportsofgoods and services 1.2 Memorandum items: Completionpoint LIC framework End-2003NPV of debt-to-exportsratio 319.9 285.6 Exports of goodsand services Current 139.5 139.5 Three year average 143.1 143.1 I/Referstopublicandpubliclyguarenteedextemaldebt. - 63 - APPENDIX I1 h r - N - - O M O G d : ' .-0 e - 64 - APPENDIX 11 Table 3. Rwanda:Sensitivity Analyses for Key Indicators ofPublic andPublicly GuaranteedExternalDebt, 2004-24 (Inpercent) Estimate Projections 2004 2005 2006 2007 2008 2009 2014 2024 NPV of debt-to-GDP ratio Baseline 25 24 25 25 24 24 20 16 A. Alternative Scenarios AI. Key variables at their historical averages in 2005-24 I/ 25 26 29 32 35 38 60 108 A2 New public sector loans on less favorableterms in 2005-24 21 25 25 26 28 28 27 24 24 B. Bound Tests BI RealGDP growth at historical averageminus one standarddeviationin 2005-06 25 24 25 25 25 24 20 17 B2 Export value growth at historical averageminusone standarddeviationin 2005-06 3/ 25 25 27 28 27 26 22 17 B3 US dollar GDP deflatorat historical averageminus one standarddeviationin 2005-06 25 29 35 36 35 34 29 23 B4 Net non-debtcreating flows at historical averageminusone standarddeviationin 2005-06 41 25 26 30 30 30 29 24 18 B5 CombinationofBI-B4 usingone-halfstandarddeviation shocks 25 3 1 42 42 41 40 33 24 B6 One-time30 percentnominal depreciationrelativeto the baselinein 2005 5/ 25 33 34 35 34 33 28 23 NPV of debt-to-exports ratio Baseline 239 260 265 267 252 237 177 137 A. Alternative Scenarios AI. Key variables at their historical averages in 2005-2411 239 287 316 341 359 380 532 911 A2 New public sector loanson less favorableterms in 2005-24 2/ 239 269 286 298 285 272 215 200 B. BoundTests BI. RealGDP growth a1historical averageminusonestandarddeviationin 2005-06 239 260 265 267 252 237 177 137 B2 Export value growth at historicalaverageminusone standarddeviationin 2005-06 3/ 239 329 473 474 448 421 311 231 B3 US dollar GDP deflator at historical averageminusone standarddeviationin 2005-06 239 260 265 267 252 237 171 137 B4 Net non-debtcreating flows at historical averageminus one standarddeviationin 2005-06 41 239 286 324 323 305 287 210 150 B5 CombinationofBI-B4 usingone-halfstandarddeviationshocks 239 317 437 437 412 387 283 198 B6 One-time30 percentnominal depreciationrelative to the baselinein 2005 5/ 239 260 265 267 252 237 111 137 Debt service ratio Baseiine I O 8 9 10 11 I O 6 9 A. Alternative Scenarios AI Key variables at their historical averages in 2005-24 I/ I O 9 I O 13 16 15 16 61 A2 Newpublic sector loans on less favorableterms in 2005-24 2/ I O 8 8 11 13 11 8 12 B. BoundTests BI Real GDP growth at historical averageminus onestandarddeviation in 2005-06 I O 8 9 I O 11 I O 7 9 B2 Export value growth at historical averageminusone standarddeviationin 2005-06 3/ I O I O 14 17 19 16 13 15 B3 US dollar GDP deflator at historical averageminusone standarddeviationin 2005-06 I O 8 9 10 11 I O 1 9 B4 Net non-debt creating flows at historical averageminusone standarddeviationin 2005-06 4/ I O 8 9 11 12 I O 9 I O B5. Combinationof BI-B4 using one-half standard deviationshocks I O 9 12 15 16 14 12 13 B6 One-time30 percentnominal depreciationrelative to the baselinein 2005 5/ I O 8 9 I O 11 I O 1 9 Memornndum item: Grant element assumedon residual financing (i.e, financingrequiredabove baseline)6/ 53 53 53 53 53 53 53 53 Source. Staffprojections andsimulations I/VariablesincluderealGDPgrowth,growthofGDPdeflator(inU.S dollarterms),non-interestcurrentaccountinpercentofGDP,andnon-debtcreatingflows. 2/ Assumes that the interestrateon new borrowing is by 2 percentagepointshigher than in the baseline.,while grace andmaturity periods are the same as inthebaseline. 3/ Exponsvalues are assumedto remainpermanentlyat the lower level, butthe currentaccountas a share ofGDP is assumedto return to its baselinelevel after the shock (implicitly assuminl an offsettingadjustmentin import levels). 4/ Includesofficial andprivatetransfers andFDI. - 65 - APPENDIX 11 Figure 1. Rwanda: Indicators of Public and Publicly Guaranteed External Debt Under Altemative Scenarios, 2004-2024 (Inpercent) 120 NPV ofdebt-to-GDPratio ...- # H /-- 100 . -Baseline e.-- ---Historical scenario ..-rc.+-/-- 80 - - Most extreme stress test .0# / ..-' 4 . ) I 60 rc/..- c /-- r.) 40 -e-- c c - - - - 20 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 900 - NPV of debt-to-exportsratio rc -----I -Baseline -- - ,.e--- Historical scenario / /.+- 700 - Most extreme stresstest .4/ .-.+- 0 600 - F rC0 100 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 60 II Debt service-to-exportsratio -Baseline 5 0 1 ---Historical scenario /' Most extreme stress test / 40 . / 30 .--, A 20 10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: Staff projectionsand simulations.