THE ANNUAL ECONOMIC REPORT FISCAL YEAR 2016/2017 … · Rwanda Annual Economic Report Fiscal Year 2016/2017 Ministry of Finance and Economic Planning Macroeconomic Policy Division

REPUBLIC OF RWANDA

Ministry of Finance and Economic Planning

THE ANNUAL ECONOMIC REPORT

FISCAL YEAR 2016/2017

March 2018

Rwanda Annual Economic Report Fiscal Year 2016/2017 Ministry of Finance and Economic Planning

Macroeconomic Policy Division i

TABLE OF CONTENTS TABLES .................................................................................................................................................. - 1 - FIGURES ................................................................................................................................................ - 1 - EXECUTIVE SUMMARY ..................................................................................................................... - 2 - I. THE INTERNATIONAL ECONOMIC AND FINANCIAL SITUATION ................................... - 4 - II. DOMESTIC ECONOMIC PERFORMANCE ............................................................................... - 7 -

2.1. Real Sector ................................................................................................................................... - 7 - 2.1.1. Introduction: Economic Growth Performance .................................................................. - 7 - 2.1.2. Real sector growth and contributions to GDP................................................................... - 7 - Agriculture ...................................................................................................................................... - 7 - Industry ........................................................................................................................................... - 8 - Services ........................................................................................................................................... - 8 - 2.1.3. Growth by expenditure components ................................................................................. - 9 -

2.2. Price Movements ........................................................................................................................ - 10 - 2.3. Fiscal Sector ............................................................................................................................... - 11 -

2.3.1. Introduction ..................................................................................................................... - 11 - 2.3.2. Original and revised Budget............................................................................................ - 11 - 2.3.3. Revenue performance...................................................................................................... - 11 - 2.3.4. Outlays performance ....................................................................................................... - 12 -

2.2. External Sector ........................................................................................................................... - 16 - 2.3.1. Balance of Payments ....................................................................................................... - 16 - 2.3.2. Trade balance .................................................................................................................. - 16 - 2.3.3. Exports of Goods ............................................................................................................ - 18 - 2.3.4. Imports of Goods ............................................................................................................ - 19 -

2.4. Rwanda Debt Developments ...................................................................................................... - 21 - 2.4.1. Debt Stock Development ................................................................................................ - 21 - 2.4.2. Debt Servicing ................................................................................................................. - 22 -

2.5. Monetary and Financial Sector .................................................................................................. - 25 - 2.5.1 Monetary Sector Developments ...................................................................................... - 25 - 2.5.2 Interest Rate Developments ............................................................................................ - 26 - 2.5.3 Exchange Rate Developments ........................................................................................ - 26 - 2.5.4 Financial Sector Developments....................................................................................... - 27 -

III. Economic outlook ........................................................................................................................... - 29 - 3.1. Real Sector ................................................................................................................................. - 29 - 3.2. Fiscal Policy Outlook for FY 2017/18 and Medium-Term ........................................................ - 29 - 3.3. Monetary and Financial Policy Outlook .................................................................................... - 30 - 3.4. External Sector Outlook ............................................................................................................. - 30 - 3.5. Regional Integration Outlook ..................................................................................................... - 31 -

CONCLUSION ..................................................................................................................................... - 32 -


Macroeconomic Policy Division - 1 -

TABLES Table 1: Table 1: World and Regional Real GDP Growth (%) ................................................................ - 4 - Table 2: Growth of Trade in Goods and Services (percent) ..................................................................... - 5 - Table 3: Real sector growth by sector (2014/2015 to 2016/2017) ............................................................ - 8 - Table 4: Revenue performance in 2016/2017 (in billion RWF) ............................................................. - 12 - Table 5: External Resources Performance .............................................................................................. - 12 - Table 6: Expenditure performance .......................................................................................................... - 14 - Table 7: Budget financing for FY 2016/17 ............................................................................................. - 15 - Table 8: Trade balance in value terms (million US$) ............................................................................. - 17 - Table 9: Trade balance in volume terms (million KG) ........................................................................... - 17 - Table 10: Rwanda Public Debt Stock (in million USD unless otherwise indicated) .............................. - 21 - Table 11: Debt service, external and domestic debt ............................................................................... - 22 - Table 12: Monetary Aggregates (end period, FRW billion) ................................................................... - 25 - Table 13: Interest Rate Developments (percent) ..................................................................................... - 26 - Table 14: Financial Soundness Indicators (percent) ............................................................................... - 28 - FIGURES Figure 1: Regional Consumer Price Inflation Rates (percent) .................................................................. - 5 - Figure 2: EAC Inflation Rates (percent) ................................................................................................... - 6 - Figure 3: Real sector Growth (2012/2013 to 2016/2017) ......................................................................... - 7 - Figure 4: GDP by expenditure components .............................................................................................. - 9 - Figure 5: Shares of GDP expenditure components ................................................................................... - 9 - Figure 6: Inflation for key items in annual average rates. ....................................................................... - 10 - Figure 7: Exports by Value and Volume respectively 16/17 (% share) ................................................. - 19 - Figure 8: Imports by Value and Volume respectively 16/17 (% share) .................................................. - 20 - Figure 9: EAC Countries Debt Stock (in Percentage of GDP) ............................................................... - 24 - Figure 10: RWF per unit currency (Indexed, June 2016 = 100) ............................................................. - 27 -



EXECUTIVE SUMMARY In Fiscal year (FY) 2016/17, Rwanda’s growth rebounded from the slowdown in first half of 2017 and the medium-term outlook is strong. During the fiscal year itself, During the fiscal year 2016/17, the Rwandan economy grew by 3.4%. This weaker performance of the Rwandan economy was largely due to the negative growth of wholesale and retail trade, construction and crop export, which recorded a shrink of 5%, 3% and 5% respectively. The negative growth in wholesale and retail trade was due to the government policy of reducing imports of second-hand clothes, which is intended over time to strengthen the environment for domestic exports. The Industry sector grew by 2% and Agriculture by 3%. This low growth was due to the drought that the country has faced which has significantly reduced food production, adds to the negative growth of export crop. However, heading into the second half of 2017 growth is rebounding and there are positive signals about agriculture, exports, and overall growth. Rwanda’s fiscal consolidation in FY 2016/17 is a policy response to: lower commodity prices - notably minerals, expansionary fiscal and monetary policies, and increased imports (on account of large public and private investment projects), which caused an increase in the current account deficit and loss of reserves. In response, the government adopted fiscal consolidation and a prudent borrowing policy to keep the level debt and external balances sustainable. Fiscal performance during FY 2016/17 was affected by general economic performance and donor disbursements which affected the flow of resources on one hand and periodic fluctuations in expenditure commitments on the other hand which impacted on spending. Tax revenues registered solid performance under direct taxes and offset the shortfall from both tax on goods and services and tax on international trade. During FY 2016/17, total actual capital expenditure amounted to 759.5 billion FRW compared to the 741.9 billion FRW in the revised budget. The excess in domestic capital financed amount spent allowed the implementation of several on-going priority projects and regarding the shortfall in external financed is explained by delays in finalizing all supporting documents associated with the tendering processes caused shortfall in the drawdown of external project loans. During FY 2016/17, the provision overall balance of payments is in deficit of US$ 5 million from a deficit of US$19.3 million at the end of previous FY 2015/16. The 74.1% increase was due to the good performance seen in trade balance since the second half of 2016 up the 2017 whole year. The current account balance is expected to improve by 14% in FY 2016/17. The trade balance is expected to improve by 21.8%, to US$ -1,063.7 million from US$ -1,359.9 million, driven by strengthened export performance (coffee, tea, minerals, non-traditional exports). Positive export trends and more modest import growth are expected to support the continued narrowing of the current account deficit to around 7.8 percent of GDP by 2019.



In response, BNR returned to an accommodative stance on monetary policy during the FY2016/17 compared to the previous year which was characterized by a relative tightening of monetary policy. The overall fiscal deficit (including grants) during FY 2016/17 was RWF 327.1billion, approximately 4.6 per cent of GDP. The deficit was financed through a combination of external and domestic debt, along with drawdown of Government deposits at BNR. Rwanda’s performance at end-2017 confirms the projected rebound and establishes a solid foundation for further upward trends in 2018. With the good agriculture performance of end-year, it is likely that the second half of 2017 demonstrates the strongest performance in recent years.



I. THE INTERNATIONAL ECONOMIC AND FINANCIAL SITUATION

1.1.Introduction: Global Economic Growth Global economic growth for 2016 remained at 3.2%, slightly higher than the forecasted 3.1% from the previous year (IMF World Economic Outlook, October 2017). This continues the global cyclical upswing which is beginning to gather strength, providing good cause for greater confidence in the global economy. The growth projection in 2017 has also been revised up from 3.4% to 3.6% in response to accelerating growth and a positive global economic environment with 2018 forecast to experience even higher growth of 3.7%. This growth is expected to be accommodated by an increase in global investment activities, significantly boosting manufacturing. The improved revised growth rates for important areas such as the Euro Area, Japan and China offset the accompanying downward revisions for the US, the UK and India. For Sub-Saharan Africa, growth is expected to slowly recover from a dramatic year, with low and negative growth rates as a consequence of the low commodity prices for the largest economies: Angola, Nigeria and South Africa. The higher growth in other African countries, especially those which are less dependent on commodity prices combined with those in the EAC have projected growth rates of over 6%, that contributed to the modest growth numbers for the region. However, many individual countries remain fragile with inflationary pressures and stagnating growth in per capita incomes.

Table 1: Table 1: World and Regional Real GDP Growth (%)

Projections 2014 2015 2016 2017 2018World 3.3 3.2 3.2 3.6 3.7 Advanced Economies 1.1 2.1 1.7 2.2 2.0 Euro Area -0.5 2.0 1.8 2.1 1.9 United States 1.5 2.6 1.5 2.2 2.3 Emerging Markets and Developing Economies 5.0 4.0 4.3 4.6 4.9 Developing Asia 7.0 6.6 6.4 6.5 6.5 China 7.7 6.9 6.7 6.8 6.5 India 6.9 7.6 7.1 6.7 7.4 Latin America and Caribbean 2.9 0.0 -0.9 1.2 1.9 Middle East, North Africa, Afghanistan, and Pakistan 2.3 2.3 5.0 2.6 3.5 Sub-Saharan Africa 5.2 3.4 1.4 2.6 3.4

Source: IMF – WEO October 2017

1.2. World Trade

Global trade volumes have continued to recover with slightly higher growth in 2016 for 2.4% compared to the forecasted 2.3%. The sharp falls in the growth rates in 2015 for emerging markets and developing countries combined with the fall in 2016 for advanced economies combined to lower the growth in world



trade volume to 2.8% and 2.4% respectively for those years. However, the high projections for 2017 and 2018 of 4.0% for both years provides an optimistic outlook on global trade. This growth is also projected to be relatively balanced with significant improvements in the growth rates of imports and exports for both advanced economics and emerging market and developing countries. Table 2: Growth of Trade in Goods and Services (percent)

Pre- crisis Post-crisis Projections

1999-2008 2009-2014 2015 2016 2017 2018

World Trade Volume 6.6 3.2 2.8 2.4 4.0 4.0

Imports

Advanced Economies 6.2 2.1 4.2 2.7 4.0 3.8

Emerging Market and Developing Countries 8.9 5.3 -0.6 2.0 4.4 4.9

Exports

Advanced Economies 5.8 2.8 3.6 2.2 3.8 3.6

Emerging Market and Developing Countries 8.8 4.3 1.3 2.5 4.8 4.5 Source: IMF – WEO October 2017

1.3. Inflation Development

In 2017, inflation is expected to rise slowly to 1.5% by the end of the year in advanced economies which have been experiencing very low inflation in recent years with rates close to zero in the Euro area and Japan. In the other areas inflation remained relatively stable during the FY2016/17, with inflation in Sub-Saharan Africa stabilizing compared to recent years where inflationary pressures from large economies such as Angola led to a large spike in 2016. Inflation in this region is forecast to decline over the next couple of years. Figure 1: Regional Consumer Price Inflation Rates (percent)

Source: IMF – WEO October 2017

0

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Infl

atio

n (%

)

Advanced Economies

Emerging Markets andDeveloping Economies

Emerging andDeveloping Asia

Latin America and theCarribean

Sub-Saharan Africa



For the EAC region, inflation fluctuated significantly across countries. Compared to other EAC countries, Rwanda ended FY2016/17 with the lowest inflation rate of 4.8% after bringing down the inflation rate from 6.9% the previous year. The largest increase in inflation was in Burundi where inflation rose from 3.9% to 15.1% during the FY2016/17. Kenya’s inflation rate, while stable for the second half of 2016, accelerated during the beginning of 2017 but this subsided during the end of the fiscal year where inflation stood at 9.2%. Tanzania and Uganda both had relatively stable inflation trajectories, ending the fiscal year with inflation of 5.4% and 6.4% respectively. Figure 2: EAC Inflation Rates (percent)

Source: MINECOFIN

1.4. Global Financial Markets Developments Recent equity market gains in both advanced economies and emerging markets resulted in strong global financial market sentiments. Moreover, short term risks to the global growth forecast are balanced. On the upside, there is strong consumer and business confidence while on the downside, policy uncertainty and geopolitical tensions are causes for concern. However, medium term risks are unbalanced with multiple potential problems. The rapidly increasing interest rates in the US and elsewhere could trigger a tightening of global financial conditions as a consequence of monetary policy normalization. Subsequently, vulnerable economies heavily dependent on those areas will be heavily influenced. Therefore, emerging market economies should be prepared for these changes which could expose financial fragilities after years of abundant credit supply. In advanced countries, a continuation of persistently low inflation remains a problem, reducing the ability of central banks to lower real interest rates. The continuing geopolitical instability in some countries as well as shifts towards protectionism can reduce cross-border flows of investment and goods with negative repercussions for financial stability, harming economic growth.

0.0

5.0

10.0

15.0

20.0

25.0

Infl

atio

n (%

)

Uganda

Kenya

Tanzania

Rwanda

Burundi



II. DOMESTIC ECONOMIC PERFORMANCE

2.1. Real Sector

2.1.1. Introduction: Economic Growth Performance During the fiscal year 2016/17, the Rwandan economy grew by 3.4%. This is 5.2% less than the previous fiscal year 2015/16 which stood at 8.6%. This was mainly driven by the service sector which dropped from 10% to 5%, due to trade and transport and taxes less subsidies shrinking by 2% and 6%, respectively. The Industry sector grew by 2% and Agriculture by 3%, while dropping respectively by 8% from 10% and 2% from 5% in 2015/16. Available data indicate that GDP per capita stood at US$ 729 in 2016 compare to US$ 735 in 2015, where the loss in per capita GDP was due to the high depreciation of the Rwandan francs towards the US$. 2.1.2. Real sector growth and contributions to GDP The growth recorded in fiscal year 16/17 is the lowest of the last 5 years as shown in the graph below, it went from 8.6% in 15/16 to 3.4% in 16/17, thus losing 5.2%. This poor performance of the Rwandan economy was largely due to the negative growth of wholesale and retail trade, construction and crop export, which recorded a shrink of 5%, 3% and 5% respectively. Figure 3: Real sector Growth (2012/2013 to 2016/2017)

Source: National Institute of Statistics of Rwanda

Agriculture Agriculture has grown by 3%, 2% less than the previous fiscal year which was 5%. This low growth was due to the drought that the country has faced which has significantly reduced food production, adds to the negative growth of export crop.

0%

2%

4%

6%

8%

10%

12%

14%

2012‐13 2013‐14 2014‐15 2015‐16 2016‐17

Agriculture Industry Services GDP



Industry The industrial sector grew by 2% in fiscal year 2016/17, 8% less than the previous one, which was 10%. This drop in growth was mainly due to construction, with a negative growth of 3%, this negative growth was due to the completion of major construction projects in the first half of 2016. The mining sector has grown by 5%, 4% better than the previous fiscal year thanks to the increase in international raw material prices. The manufacturing sector grew by 6% in 2016/17 from 8% in the previous fiscal year, this drop was due to beverages and tobacco which achieved a negative growth of 1%. Services Remaining the largest share of GDP with 47%, the service sector grew by 8% in 2016/17, 5% less than the previous year. “Other Services” was the largest contributor, and grew by 8% in 2016/17.This was led by Administrative and support activities and Real Estate activities which grew by 14% and 8% respectively in 2016/17, 4% less than the previous year for the administrative and support activities and 2% more than the previous year for Real estate activities. Wholesale and retail trade grew negatively by 5% in 2016 from 12% in the previous fiscal year, leading to a negative growth of Trade and Transport of 2%. The negative growth in wholesale and retail trade was due to the government policy of reducing considerably imports of second hand clothes. Table 3: Real sector growth by sector (2014/2015 to 2016/2017)

Contribution to Growth

Growth rate (percent)

Shares of Nominal 2014 Constant prices GDP (percent)

2014/ 15

2015/ 16

2016/ 17

2014/ 15

2015/ 16

2016/ 17

2014/ 15

2015/ 16

2016/ 17

Overall GDP 8.6 8.6 3.4 8.6 8.6 3.4 ... … … Agriculture 2.0 1.4 0.9 7 5 3 28 28 31 Food crops 1.4 0.7 0.6 8 4 3 17 12 20 Export crops 0.1 0.3 -0.1 5 14 -5 2 2 2 Industry 1.9 1.7 0.3 11 10 2 17 17 16 Mining & quarrying 0.6 0.0 0.1 19 1 5 3 2 2 Manufacturing 0.5 0.5 0.4 9 8 6 6 6 6 Construction 0.7 1.1 -0.2 10 16 -3 7 7 6 Services 4.3 4.7 2.4 9 10 5 48 47 47 Trade and transport 1.0 1.3 -0.2 8 11 -2 12 12 11 Wholesale & retail trade 0.8 0.8 -0.4 10 12 -5 8 7 7 Financial services 0.2 0.3 0.1 7 11 2 3 3 3 Source: National Institute of Statistics of Rwanda



2.1.3. Growth by expenditure components After registering a high growth in 2015/16, Gross Capital Formation registered a negative growth in 2016/17 of 3%, from 20% in 2015/16. The growth in the Private consumption shrank by 3% in 2016/17 from 12% in 2015/16. The reduction in Gross Capital Formation was due to the completion of big projects in the first half of 2016. Export of Goods and Services registered a pickup of 20% growth in 2016/17 from 5% in 2015/16, which led to an improvement of the Resource balance of 18% in 2016/17. This is in line with the government export promotion policy called “made in Rwanda” and also the reduction in import which registered a negative growth of 5% in 2016/7. Figure 4: GDP by expenditure components

Source: National Institute of Statistics of Rwanda Figure 5: Shares of GDP expenditure components

Source: National Institute of Statistics of Rwanda

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011‐12 2012‐13 2013‐14 2014‐15 2015‐16 2016‐17

GDP Total final consumption expenditure

Gross capital formation Exports of goods & services

Imports of goods & services

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total finalconsumptionexpenditure

Gross capitalformation

Exports of goods& services

Imports of goods& services

2013‐14 2014‐15 2015‐16 2016‐17



2.2.Price Movements Rwandan’s inflation remained generally high with headline inflation averaging 6.8% over 2016/17. Inflation was mainly driven by increase in food prices following the drought which weakened domestic harvests. Energy and transport prices were high mainly due to the upward trend in international oil prices. Recent trends in commodity prices were mixed depending on both supply and demand factors. Inflation stood at 6.9 percent year on year in July 2016 and declined progressively to reach 4.8 percent in June 2017. Year-on-year, cost increased at a slower pace for: education, communication and restaurants and hotels. Meantime, cost rose more than in the preceding year for health (6.6 percent from 0.1 percent) by end June 2017. Domestic goods inflation declined considerably from 7.5 percent in July 2016 to 4.3 percent by end June 2017 while imported inflation increased to 6.4 percent in June 2017 from 5.2 in July 2016 mainly due to increasing international food and oil prices, and inflationary pressures in the EAC countries. Figure 6: Inflation for key items in annual average rates.

Consumer prices increased in all EAC countries for the fiscal year 2016/17, the lowest inflation was registered in Rwanda 4.8 percent year-on-year in June of 2017, while Burundi recorded the highest inflation for the same period (15.1%). Inflation rate in EAC averaged 8.2 percent from July 2016 to June 2017 (6.5% excluding Burundi), as prices grew rapidly for food and housing and utilities.

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

June 16 June 17

GENERAL INDEX (CPI)

Food and non‐alcoholic beverages

Alcoholic beverages and tobacco

Clothing and footwear

Housing, water, electricity, gas andother fuelsFurnishing, household equipment androutine household maintenanceHealth

Transport

Communication

Recreation and culture

Education

Restaurants and hotels

Miscellaneous goods and services



2.3. Fiscal Sector

2.3.1. Introduction Fiscal performance during the fiscal year 2016/17 was affected by general economic performance and donor disbursements which affected the flow of resources on one hand and periodic fluctuations in expenditure commitments on the other hand which impacted on spending. Tax revenues registered solid performance under direct taxes and offset the shortfall from both tax on goods and services and tax on international trade. Regarding outlays, the level of spending during the fiscal year 2016/17 was impacted by delays in finalizing all the paper work required for spending and payments. Total expenditure and net lending amounted 1 942.9 billion FRW with 45.1 billion FRW higher than 1 897.8 billion FRW estimated for the entire fiscal year 2016/17, where both recurrent spending and capital spending contributed to the excess expenditure. 2.3.2. Original and revised Budget The original envelope of the 2016/17 budget was revised upwards slightly from 1949.4 billion FRW to 1954.2 billion FRW. In economic classification terms of the revised budget, total revenue and grants were estimated at 1567.1 billion FRW comprising 1240.5 billion FRW of domestic revenue collections and total grants of 326.6 billion FRW whilst total expenditure and net lending was projected at 1897.8 billion FRW comprising recurrent expenditure of 1040 billion FRW, 741.9 billion FRW of capital expenditure and net lending outlays of 115.8 billion FRW. 2.3.3. Revenue performance 2.3.3.1.Domestic revenue performance During the period under view, tax revenue showed a good performance by reaching 1,104.1billion RWF against a projection of 1101.4 billion RWF, as shown in table 1 below, resulted from an over performance of direct taxes by 19.8 billion FRW more to 446.8 billion FRW projected and this good performance of direct taxes covered the shortfall from both tax on goods and services with 15.7 billion FRW lower to the projection and tax on international trade with 1.3 billion FRW less to projected amount . Company income taxes and PAYE both contributed to the good performance of direct taxes.However, a shortfall observed in both tax on goods and services and tax on international trade comes from the bad performance of excise duty on the side of tax on goods and services. Lower imports of around 11 percent also played a role in the shortfall of taxes on international trade. Concerning non-tax revenue, targets were by and large exceeded projections reaching a total of 193.7 billion RWF or 54.6 billion FRW higher than the 139.1 billion FRW projected, and FRW 26.1 billion higher compared to 167.6 billion FRW registered in FY 2015/16. This was mainly due to higher reimbursement on account of Peace Keeping Operations (PKO) by the UN in the fiscal year 2016/17..



Table 4: Revenue performance in 2016/2017 (in billion RWF)

2.3.3.2.External resource performance The actual disbursement of total grants was slightly higher than in the revised budget projection; where 330.2 billion FRW was registered compared to 326.6 billion FRW estimated in the revised budget representing 11.6% decline compared to FY 2015/16. This excess of 3.6 billion FRW was mainly resulted from budgetary grants while capital grants match exactly the projection with 146 billion FRW. The total of projects and budgetary loans disbursements registered a shortfall of 36.9 billion FRW that came mainly from projects loans whilst budgetary loans were on track and met the projections. Table 5: External Resources Performance

2.3.4. Outlays performance At end June 2017, total expenditure and net lending amounted to 1942.9 billion FRW. This outturn amount was 45.1 billion FRW higher than the 1897.8 billion FRW estimated for the entire fiscal year 2016/17 in the revised budget. Both recurrent and capital spending contributed to the excess expenditure.

2015/16

Act Proj. Act.

Revenue and Grants 1,539.9 1,567.1 1,615.8

Total Revenue 1,167.9 1,240.5 1,285.6

Tax Revenue 1,000.3 1,101.4 1,104.1

Direct Taxes 406.2 448.6 468.4

Taxes on goods and services 510.3 560.3 544.6

Taxes on international trade 83.9 92.5 91.2

Non‐tax revenue 167.6 139.1 193.7

of which PKO 122.9 84.9 128.5

of which Other(Inc.LG) 44.7 54.2 52.9

Source:MINECOFIN

FY 2016/17

2015/16

Act Proj. Act.

Total Grants 373.7 326.6 330.2

Budgetary grans 204.8 180.6 184.2

Capital grants 168.9 146.0 146.0

Projects 168.9 146.0 146.0

Total Loans 244.5 381.5 344.6

Budgetary loan 138.7 183.6 183.8

Project loan 105.9 197.9 160.7

Source:MINECOFIN

External resource

FY 2016/17



2.3.4.1.Recurrent expenditure Total spending under this category amounted FRW 1069.6 billion which was FRW 29.6 billion higher to FRW 1040 billion projected in the revised budget and the FY 2016/17 current expenditure was 12.9% higher compared to FY 2015/16.

Wages and salaries – The expenditure under wages and salaries registered 263.7 billion FRW that was 5.4 billion FRW higher to the estimates of the revised budget. Classification issues between wages and salaries and transfers about civil servants’ emoluments; new recruitment especially in health and education sectors; restructuring costs in some ministries and late payments of some bonuses and allowances on promotions accounts, all are the major reasons behind higher spending in this category.

Goods and services – The spending on goods and services were on track amounting to billion FRW 207.4 projected in the revised budget the FY 2016/17 and it represented a growth of 14.8% compared to the FY 2015/16.

Interest–Interest payment for FY 2016/17 amounted 72.2 billion FRW which was 8.1% less compared to 78.6 billion FRW projected in the revised budget. This shortfall was from both domestic and external, where lower than expected sales of short term securities for budgetary financing purposes influenced domestic interest while lower drawdown of project loans alluded to in the previous two fiscal years also accounted for shortfall in external interest payments.

Transfers and subsidies-The actual amount of 366.9 billion FRW was higher by 6.6 billion FRW comparing to the revised budget estimate of RWF 360.3 billion. A large portion of the excess in this category came from the issue classification between transfers and wages and salaries as mentioned above.

Exceptional expenditures–Exceptional expenditures accounted an excess spending of 24 billion FRW to 135.4 billion FRW projected in revised budget. This excess is solely due to front loading of additional funds required for the UN Peace Keeping Operations where 128.2 billion FRW was spent compared to the 104.1 billion FRW projected. This large spending was in line with the UN disbursement to PKO and the latter are recorded under non-tax revenue above.

2.3.4.2.Capital expenditure During the fiscal year 2016/17, total actual capital expenditure amounted to 759.5 billion FRW compared to the 741.9 billion FRW in the revised budget representing 17.5 per cent growth of the capital expenditures estimates of the revised. The excess in domestic capital financed amount spent allowed the implementation of several on-going priority projects and regarding the shortfall in external financed is explained by delays in finalizing all supporting documents associated with the tendering processes caused shortfall in the drawdown of external project loans.



2.3.4.3.Net lending Expenditure under net lending in the fiscal year 2016/17 amounted to 113.8 billion FRW compared to the revised budget estimate of RWF 115.8 billion. Hence, the actual were almost the same as the projection with a slight shortfall of 2.0 billion FRW. Table 6: Expenditure performance

2.3.5. Deficit and financing As indicated above, the revised budget estimated total revenue and grants of 1567.1 billion FRW and total expenditure and net lending of 1897.8 billion FRW, with this projections, the FY 2016/17 estimated an overall deficit of 350.7 billion FRW, which was to be financed by external borrowings amounted to 356.9 billion FRW. This amount was not only to finance the deficit but it would also allow the government to build up a small banking sector deposit of 6.1 billion FRW. At the end of the fiscal year in June 2017, total revenue and grants had risen to 1615.8 billion FRW with an excess of 48.7 billion FRW compared to the revised budget projection. Total expenditure and net lending registered 1942.9 billion FRW, which exceeded the projected amount of FRW 1897.8 billion by 45.1 billion FRW. FY 2016/17 closed with an overall cash deficit of 347.2 billion FRW which was 3.5 billion FRW lower than the 350.7 billion FRW estimated in the revised budget. This deficit was financed partly with net foreign borrowing of 322.7 billion FRW. Domestic financing accounted 24.6 billion FRW amount also contributed to finance the deficit. The lower foreign borrowings here, as mentioned above was due to delays in disbursement of project loans for foreign financed capital projects; whilst the domestic portion of financing was from banking and non-banking sectors.

2015/16

Act Proj. Act.

Total expenditure and net lending 1,757.6 1,897.8 1,942.9

Current expenditure 947.5 1,040.0 1,069.6

Wages and salaries 242.3 258.3 263.7

Purchase of goods and services 180.6 207.4 207.4

Interest payments 56.7 78.6 72.2

Domestic Int(paid) 25.4 40.6 35.3

External Int(due) 31.3 38.0 36.9

Transfers 308.7 360.3 366.9

of which expenditures on local government taxes 40.4 54.2 47.9

Exceptional social expenditure 138.5 135.4 159.4

Capital expenditure 721.7 741.9 759.5

Domestic 446.9 398.0 418.2

Foreign 274.8 343.9 341.3

Net lending 88.4 115.8 113.8

Source:MINECOFIN

Outlays Performance

FY 2016/17



Table 7: Budget financing for FY 2016/17

2015/16

Act Proj. Act.

Financing 243.6 350.7 347.2

Foreign financing(net) 227.4 356.9 322.7

Drawings 244.5 381.5 344.6

Budgetary loan 138.7 183.6 183.8

Project loans 105.9 197.9 160.7

Amortization(due) ‐17.1 ‐24.6 ‐21.9

Domestic financing 16.2 ‐6.1 24.6

Banking system(Monetary Survey) ‐0.6 ‐6.1 16.6

Non bank(Net) 44.2 0 32.3

Govenrment Securities(Net) 59.3 34.0 58.7

Non Bank Sector Repayment ‐15 ‐34.0 ‐26.4

Errors and Ommmissions ‐27.4 0 ‐24.3

Source:MINECOFIN

FY 2016/17

Performance of Financing



2.2. External Sector 2.3.1. Balance of Payments During the FY 2016/17, the provision overall balance of payments1 is in deficit of US$ 5 million from a deficit of US$ 19.3 million at the end of previous FY 2015/16. The 74.1% increase was due to the good performance seen in trade balance since the second half of 2016 up the 2017 whole year. This affected positively the current account which is the traditional account of the BOP. The financial and capital accounts also have improved by 6% and 22% respectively, due to the reduction of long term debt in 2017 which was heavy in CY 2016, and the decline in capital transfers on the side of capital account. The current account balance is expected to improve by 14% in FY 2016/17 compared to the previous FY 2015/16 specifically due to the trade balance improvement recorded since the second half of CY 2016 up to end 2017; and this component has around 80% of share to the current account. This means that if the component is negatively affected, the current account follows the same trend. The service sector balance is expected to improve by 41.7% due to the big drop of other business services imports. This is related to the import of services for big projects such as Kigali Convention Center and Rwandair that happened in 2015 and 2016, whereas it is not the case in 2017. However, the secondary income is expected to slightly decline by 3% due to the drop of total official transfers by 5.8%, which depends on the international economic growth situation. 2.3.2. Trade balance In 16/17 the trade balance is expected to improve by 21.8%, to US$ -1,063.7 million from US$ -1,359.9 million in previous fiscal year 15/16. This was due to the export increase of 23.9% in terms of value against the decline of import value of 6.4% recorded in 16/17 compared to previous year 15/16. The same trend was seen in trade deficit – in terms of volume, where it improved by 11% due to the export volume increase of 27% against the decline of import volume of 3%. According to the export coverage, it has increased to 44.5% in 16/17 from 33.6% in the previous year, and this confirms the export performance compare the import decline seen in the same year.

1 The balance of payment is compiled on BPM6 framework basis, which broadly maintains the methodology of BPM5 but is much more synchronized with the other macroeconomic statistics such as the System of National Accounts (SNA 2008), monetary and financial statistics (MFS) as well as government financial statistics manual (GFSM2014). The BPM6 framework takes on board effects of globalization and financial innovation which have become prominent in recent years.



Table 8: Trade balance in value terms (million US$)

2015/16 2016/17 Change in %

Exports FOB 688.2 852.5 23.9% O/W Coffee 60.7 58.5 -3.6% Tea 70.4 74.6 6.0% Minerals 94.3 94.0 -0.3% Other products 126.7 215.6 70.2% Re- exports 200.5 254.3 26.8%

Adjustment (proj) 135.6 155.4 14.6%

Imports FOB 2,048.10 1,916.20 -6.4% O/W Consumer goods 567.9 575.3 1.3% Capital goods 606.1 491.4 -18.9% Intermediate goods 505.2 442.3 -12.5% Energy 210.2 195.8 -6.9%

Adjustment (proj) 158.7 211.4 33.2%

Trade balance -1,359.9 -1,063.7 -21.8%

Source: Statistics department, BNR Table 9: Trade balance in volume terms (million KG)

2015/16 2016/17 Change %

Exports 422.2 534.7 27% O/W Coffee 19.6 18.5 -6% Tea 24.7 25.1 2% Minerals 6.6 7.0 6% Other products 174.5 209.3 20%

Re- exports 196.8 274.8 40%

Imports 2017.9 1950.2 -3%

O/W Consumer goods 721.3 745.4 3% Capital goods 77.0 60.6 -21% Intermediate goods 912.7 834.5 -9%

Energy 306.9 309.7 1%

Trade balance -1595.7 -1415.5 -11%

Source: Statistics department, BNR



2.3.3. Exports of Goods In 2016/17, export of goods value has increased by 23.9%, to USD 852.5 million from USD688.2 million recorded in 15/16. This increase was especially due to the performance of other products such as other minerals (gemstones, irons, gold bar and others). In addition to this, traditional export has slightly increased by 0.8% due to the drop of commodity prices at international market especially in 2015 and 2016. However, re-export has increased by 26.8%, to especially due to the high demand from neighboring countries Burundi and DRC. This is related to the close of TOTAL Company in Tanzania which had a contract with the Government of Burundi to supply fuel, and from there, Rwandese fuel traders have gained so much that market and export more in Burundi. During the period under review, the coffee sector has declined by 3.6% in terms of value due to the price decline experienced in 2015 and 2016, and this sector has a seasonality behavior where the high season start in July towards November of the year. Therefore, all coffee actors have the culture of stockpiling the production for speculating the high season and normally the first half the calendar year, export of coffee is less that the second half of the CY year. Moreover the coffee sector has a cyclical behavior, which means that when the current year production increase, the following year production should decline. This has been seen for long and affect the sector projections process where numbers should be judged. The tea sector has increased by 6% in terms of value, and was driven by the increase of both price and volume. This is related to the high international demand, which came from the world low supply compared to what was expected. It was due to the weather disappointment for two big tea producers Sri-Lanka and India where the sector did not have enough rain and by consequence, lowest production. These countries are not now competitive at international market, however other countries including Rwanda have potential to export more, as their competitors are not winning. So, Rwanda exporters were encouraged to export more so long as the price is the best ever. In general, mining sector has recovered since 2017 in terms of prices, but the big contributor (tantalum) started recovered since July 2017. When comparing with 16/17 to previous fiscal year, the sector slightly declined by 0.2% due to the shock happened in the last two calendar years. Cassiterite has increase in both value and volume by 46.3% and 17.8% respectively, however tantalum declined in both value and volume by 24.5% and 10.4% respectively. This was related to the issue of being price takers at international market where should apply the same price at the market. So tantalum started recovering in the second half of 2017 CY. Wolfram sector continued to decline since last three years due the price decline at international market, but there is a hope in future because the sector gives good signs in the world economic outlook. On the side of policy making - despite the subsequent fall in price, the Board in charge of the mining sector is putting in place strategic measures like encouraging investors to invest in the sector, exploration, market diversification and value addition to production such as iron and tin for boosting its export (Smelter Company already established). These measures are positively impacting the sector.



Figure 7: Exports by Value and Volume respectively 16/17 (% share)

Source: BNR, Statistics Department

2.3.4. Imports of Goods Import of goods have declined by 6.4% during 16/17, driven by the reduction of capital goods by 18.9%, which is one of the bigger categories of imports of goods. This resulted from a lot of import of capital goods recorded in early 2016, due to the deadline of transitional period of investment code, where all exemptions to capital goods should be removed. In this case, people imported more trucks, trailer and other machines during the first half of 2016. Addition to this, the EAC law for increasing taxes to old cars imports also increased import of capital goods in the first half of 2016 for people to escape the deadline which was April 2016. This justifies the decline seen in 16/17. In general, the deceleration in some import categories along the way, especially food and intermediate goods reflect import substitution policies. Intermediate goods have declined by 12.5%; of which category of construction materials has declined a lot, which is related to low construction sector along the year 2017 compared to 2016 and 2015. The same picture should be consistent with GDP (particularly cement whose domestic production has been expanded). Still under the same category, industrial products continue to increase in terms of value, and this is related to the strategy of Made in Rwanda, where resident companies are importing raw materials for locally production, then for boosting exports.

7%

9%

11%

25%

30%

18%

Export value 16/17

Coffee Tea Minerals

Other products Re‐exports Adjustment

3%

5%

1%

39%51%

Export volume 16/17

Coffee Tea Minerals Other products Re‐ exports



Figure 8: Imports by Value and Volume respectively 16/17 (% share)

38%

3%

43%

16%

Import volume 16/17

Consumer goods Capital goods

Intermediate goods Energy

30%

26%

23%

10%

11%

Import value 16/17

Consumer goods Capital goods

Intermediate goods Energy

Adjustment



2.4. Rwanda Debt Developments 2.4.1. Debt Stock Development The overall fiscal deficit (including grants) during FY 2016/17 was RWF 327.1billion, approximately 4.6 per cent of GDP. The deficit was financed through a combination of external and domestic debt, along with drawdown of Government deposits at BNR. Debt owed to the banking system increased due to the new issued treasury bonds and treasury bills sold to commercial banks for domestic market development. The external debt stock as well increased due to additional new disbursements of concessional as well as commercial loans. As a result of these developments, the total public and publicly guaranteed debt for FY 2016/17 increased 35.9 percent to 46.2 percent of GDP, of which 35.6 percent of GDP is external and 10.7 percent of GDP is domestic. However, the external guarantees stock decreased by 1.4 per cent of GDP over the fiscal year as RwandAir successfully paid back some expensive commercial loans. Table 10: Rwanda Public Debt Stock (in million USD unless otherwise indicated)

Source: MINECOFIN Debt Management Unit

Concessional loans continue to constitute the majority of the external debt portfolio (32.1 percent of GDP). The main concessional creditors are the World Bank International Development Association (IDA), at 39 percentage points of the whole external portfolio, followed by the African Development Bank (AfDB) and

June-16

June-17

Million (USD)

% of GDP

Share of total debt (%)

Million (USD)

% of GDP

Share of total debt (%)

Total public and publicly guaranteed debt 3023 35.9 100.0 3288.4 46.2 100.0

External 2,306 27.4 76.3 2535.9 35.6 77.1

Concessional 1,849 23.4 80.2 2289.5 32.1 69.6 Commercial 458 5.8 19.8 1961.7 27.5 59.7 o/w Eurobond 400 5.1 87.4 327.7 4.6 10.0

Domestic 717 8.5 23.7 765.0 10.7 23.3

in billion RWF 717 8.5 23.7 400.0 5.6 12.2

Government External guarantees 58 0.7 1.9 45.2 0.6 1.4

Government Domestic guarantees 22 0.3 0.7 319.8 4.5 9.7

Nominal fiscal year GDP (RWF bn) 6,459 752.4 10.6 22.9

Nominal fiscal year GDP (USD mn) 8,421 707.5 - - Exchange rate 767 44.9 - -



The International Fund for Agricultural Development (IFAD), whose funds were used for projects in the areas of transport, construction, energy, poverty reduction and rural development. Currently the government provides no guarantees for the debt of private sector entities. Central government does guarantee loans given to RwandAir (worth US$ 57.8 million as of June 2017) form part of the total public debt stock. The recent rating on Rwandan debt is affirmed at B+ by Fitch, with outlook stable which confirms the good international standing of the Rwandan government. This stable outlook reflects the view that external funding will remain supportive of Rwanda’s external position, while its fiscal position will not significantly deteriorate from our current forecasts. 2.4.2. Debt Servicing External debt service increased slightly during FY 2016/17. The main reason for this is the commencement of payment of principals to some loans after their grace periods had concluded, as well as payment of interests to new loans without grace periods. However, at the equivalent of 4.2 percent of exports and 4.6 percent of all total revenues including grants in this fiscal year, external debt service remains sustainable. Domestic debt service also increased due to the higher amortization of all accumulated quarterly T-bonds issued in the FY 2016/17, as well as higher interest payments from the refinancing of T-bills that have been rolled over during the year. These have been rolled over due to the cash flow needs and for the development of Rwanda’s capital market. Table 11: Debt service, external and domestic debt

Source: MINECOFIN Debt Management Unit 2.4.1. External Debt Sustainability Analysis (DSA) Rwanda’s nominal debt-to-GDP ratio is projected to reach a level of 47.1 percent slightly higher than 44.6 per cent of GDP recorded at end 2016. However, Rwanda’s debt remains sustainable. The debt stock will increase in line with Rwanda’s development needs but with due regard to Rwanda’s economic growth and ability to pay.

FY 2015/16 FY 2016/17

Principal Interest Total Principal Interest Total

External (USD mn) 23.9 41.4 65.2 27.6 44.7 72.3 External (% exports) 1.6 2.8 4.4 1.6 2.6 4.2

External (% total revenues)

4.2 4.6

Domestic (RWF bn) 819.0 25.3 844.3



The MINECOFIN External DSA was based on a cautious macroeconomic outlook and calculated based on data from end-June 2017. This included key assumptions such as long run growth of GDP and exports growth 7.0 percent and 6.0 percent respectively over the medium term. Despite this cautious approach, the DSA still showed that Rwanda’s external public and publicly guaranteed debt outlook is sustainable from 2016 (first year of projection) through 2036. While there is some risk of a breach of the debt service-to-exports ratio (26.7 percent against a threshold of 25 per cent in 2023, as of last analysis), closer analysis – which accounted for Rwanda’s above-average CPIA score – showed this is not problematic. Under the probability approach, Rwanda may be considered at low risk of debt distress, given the assumption that it is able to refinance the Eurobond falling due in 2023, while keeping a sound macroeconomic environment. Rwanda currently has a relatively debt-to-GDP figure, after debt cancellation in the mid-2000s, and due to careful debt management ensures that additions to the stock remain in line with GDP growth, exports and revenues mobilization forecasts and that it is as concessional as possible. The main risks emerging from the analysis is the debt servicing of commercial debt, potential for continued poor performance of exports, and any potential inability to refinance the Eurobond in 2023. While it may be possible to roll over this debt, the interest rate is not guaranteed to remain stable. Mitigation of the risk is possible by careful debt management, seeking alternatives to non-concessional borrowing, and importantly also by strong growth in exports. In addition to that, strong growth in domestic revenue will ease the fiscal pressure for domestic and external loans. 2.4.2. Rwanda’s Debt in the East African Context Public debt-to-GDP in Sub-Saharan countries has increased since 2013 and is now above 50 percent of GDP. The risk of debt distress remains low across the EAC, excluding Burundi and South Sudan (IMF-World Bank Debt Sustainability Analysis, 2017). Yet across EAC countries, public debt has been increasing faster since 2012. Over 2012-2016, public debt increased by 11 percent of GDP in Kenya. As of end December 2016, the average Nominal debt stock for EAC countries stood at 40.4 per cent of GDP respectively 54.4% in Kenya, 44.6 % in Rwanda, 39.2% in Tanzania, 38.6% in Uganda and 26.9% in Burundi given its projects development needs. The rise of public debt across Rwanda, EAC and Africa in general is mainly driven by Public investment financing, Extension of government guarantees, Exchange rate depreciation, large primary deficits, and growing interest bills.



Figure 9: EAC Countries Debt Stock (in Percentage of GDP)

15

25

35

45

55

15

25

35

45

55

2008 2009 2010 2011 2012 2013 2014 2015 2016

Public Debt in EAC(percent of GDP)

Rwanda Tanzania

Uganda Kenya

Source: IM F W orld Econom ic Outlook Database



2.5. Monetary and Financial Sector 2.5.1 Monetary Sector Developments The BNR returned to an accommodative stance on monetary policy during the FY2016/17 compared to the previous year which was characterized by a relative tightening of monetary policy. This was evidenced by the fact that the key repo rate was reduced twice from 6.50% to 6.25% and later to 6.00% as lower pressure on both the inflation and exchange rates provided a more favorable environment to continue supporting the economy through the banking sector. This resulted in an expansion of broad money (M3) which grew at a rate of 12.7%, larger than the 10.1% growth from the previous year as well as a reduction in reserve money by 2.7%. This growth in monetary aggregates is a consequence of the significantly large growth in Net Foreign Assets (NFA) of 29.0% which was primarily driven by commercial banks following a year with negative growth of 5.3%. While the NFA of the BNR grew by 7.3%, continuing the positive trend of 6.7% from the previous year, the NFA of commercial banks grew by 3703.4% as a result of a sizeable base effect from last year which experienced a negative growth of 105.1%. In contrast, there was only a marginal increase of 3.5% in the Net Domestic Assets (NDA), significantly lower than relatively high growth rates from previous years. This is due to the fact that growth in credit to the private sector slowed down from 22% in FY2015/16 to 8.2% in FY2016/17 while credit to the government grew by 8.0%, only a slight decrease from 10.9% the previous year. On the money demand side, the currency in circulation growth declined from 11.7% in FY2015/16 to 5.9% in FY2016/17 while the growth of deposits accelerated from 10.0% to 13.4% as a consequence of increased demand and foreign currency deposits. The rise in foreign currency deposits was due to improved external sector performance, with export receipts increasing by 27.7% combined with a decline in the import bill of almost 10%.

Table 12: Monetary Aggregates (end period, FRW billion)

Percentage Change (%)

Jun-15 Dec-15 Jun/16 Dec/16 Jun/17 Jun-15/ Jun-14

Jun-16/ Jun-15

Jun-17/ Jun-16

Net Foreign Assets 599.5 642.6 567.5 739.2 731.9 14.0 -5.3 29.0

Net Domestic Assets 828.3 839.5 1004.9 853.5 1040.3 53.8 21.3 3.5

Credit to Private Sector 1042.1 1178.1 1271.6 1269.6 1375.3 13.5 22.0 8.2

Credit to Government 287.0 304.1 318.3 284.5 343.7 36.2 10.9 8.0

Broad Money (M3) 1427.8 1482.1 1572.4 1592.4 1772.2 27.2 10.1 12.7

Current in Circulation 134.9 142.6 150.8 145.9 159.7 2.7 11.8 5.9

Deposits 1292.9 1339.5 1421.6 1446.8 1612.5 30.6 10.0 13.4

Reserve Money 272.8 286.9 316 302.8 307.4 10.6 15.8 -2.7 Source: BNR



2.5.2 Interest Rate Developments Through FY2016/2017, the money market interest rates decreased in response to liquidity conditions and the accommodative stance on monetary policy by the BNR with the key repo rate falling from 6.5% to 6.25% and then later to 6.0%. The weighted normal rate of T-Bills increased from 7.30% to 9.42% between June 2016 and March 2017 before declining to 8.78% by the end of FY2016/17. For the commercial banks' interest rates, deposit and lending interest rates initially increased during the first half of the fiscal year before declining to 7.92% and 16.76% respectively by the end of the fiscal year. The reduction in the lending rate was in response to the drop in the rate charged to individual borrowers' which fell from 18.07% in December 2016 to 17.4% on average for the first half of 2017. Table 13: Interest Rate Developments (percent)

Jun-15 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

Key Repo Rate 6.50 6.50 6.50 6.25 6.25 6.00

T-Bills Rate 4.05 7.30 8.22 9.02 9.42 8.78

Deposit Rate 8.80 7.90 8.28 8.01 7.84 7.92

Lending Rate 17.26 17.00 17.36 17.21 16.89 16.76

Source: BNR

2.5.3 Exchange Rate Developments During the FY2016/17, the RWF continued the trend of depreciation, albeit at a slower rate overall when compared with the previous fiscal year. For the first half of the fiscal year, a combination of declining international commodity prices and high demand for forex from large Public-Private Partnership projects placed a lot of pressure on the exchange rate. This trend reversed towards the second half of the fiscal year due to a recovery in international commodity prices and improved external sector performance, lowering the pressure on the currency. The Rwandan Franc (RWF) depreciated by 6.0% against the US Dollar (USD) in the FY2016/17 whereas this was 8.9% in the previous fiscal year. When compared to other specific currencies, the RWF depreciated by 9.0% against the Euro (EUR) and by 2.8% against the Pound Sterling (GBP) after a year of UK specific appreciation as a consequence of Brexit. In comparison to the Japanese Yen (JPY), the RWF appreciated after a high percentage depreciation of almost 30% in the previous fiscal year. In the East-African Community the trend of depreciation continues as well. In the fiscal year 2016/17 the currency depreciated against the Kenyan Shilling (KES), the Ugandan Shilling (UGX), the Tanzanian Shilling (TZS) and the Burundian Franc (BIF) by 3.3%, 0.6%, 3.7% and 2.6% respectively. In terms of the FRW real effective exchange rate (REER), there was a depreciation of 4.7% in FY2016/17 compared to 2.2% in the previous fiscal year. This can be attributed to the nominal depreciations of RWF against the currencies of the main trading partners well as an increase in the inflation differential.



Figure 10: RWF per unit currency (Indexed, June 2016 = 100)

2.5.4 Financial Sector Developments The Rwanda financial sector has continued to deepen with total assets relative to GDP reaching 54.3% in June 2017 compared to 33.8% in June 2010. with a growing role in the national economy. While the banking sector remains the largest sector in the financial system, there has been significant diversification with the growing importance of MFIs and SACCOs. Despite the declining share of the banking sector, total assets grew by 12.9% to RWF 2.572 billion during the fiscal year 2016/17, only marginally less than the 14% of the previous fiscal year. This slowdown is primarily a consequence of lower demand for credit in response to the weakened economic performance during the first half of 2017. The main source of asset funding remains customer deposits which contribute up to 65% or FRW 1,674 billion or total assets with an annual growth rate of 11% compared to 28% the

106.0

109.8

102.8

97.3

90.0

92.0

94.0

96.0

98.0

100.0

102.0

104.0

106.0

108.0

110.0

USD-Index EUR-index GBP-index JPY-index

102.6

103.3

100.6

103.7

96.097.098.099.0

100.0101.0102.0103.0104.0105.0106.0

BIF-index KES-index UGX-index TZS-index



previous year. This reduction in growth is a result of customers searching for higher returns offered by government securities as evidenced by the increase of 62% in the investment by individuals in T-bills and T-bonds. Moreover, banks are still facing problems to meet long term investments needs because 85% of deposits are short-term, having a maturity of twelve months or less. Therefore, efforts are being made to enhance the saving culture and the development of a capital market in order to create a larger source of long-term funds. With regards to the financial soundness indicators of banks, FY2016/17 continue the negative trends from the previous year. According to the indicators on asset quality, the quality of the loan book of banks deteriorated when compared to previous financial year as the NPL ratio increased from 7% to 8.2% due to weak project assessment by banks, insufficient credit monitoring and weak economic performance in the first half of 2017. This rise can be attributed to the ratio of NPLs in the agricultural sector which increased by 18.4% in June 2017 compared to 16.9% in June 2016 as well as in the service sector where the ratio of NPLs increased by 10.7% compared to 4.5% over the same period due to weak domestic demand. As a consequence of the increasing ratio of NPLs, the BNR has expanded its supervision efforts to guarantee appropriate loan classification and adequate provisioning with the aim of reducing the ratio of NPLs to 5% in the medium term. Furthermore, the solvency ratio, which has been decreasing for three consecutive years is now at 21%. During this period, the banking sector remained liquid, with no bank having a liquidity ratio below 20% with an overall average of 39%. However, the liquidity ratio has been consistently decreasing from 63% in June 2014, continuing the declining trend of previous years. Table 14: Financial Soundness Indicators (percent)

June 2015 June 2016 June 2017 Capital Adequacy: Solvency Ratio (min 15%) 24 23 21 Asset Quality: NPLs/Gross Loans 5.9 7.0 8.2 Liquidity: Liquid assets/total deposits (min 20%) 49 43 39

Source: BNR



III. ECONOMIC OUTLOOK

3.1.Real Sector In 2017, Rwanda rebounded from the slowdown in first half of 2017 and the medium-term outlook is strong. Growth rate for the whole of 2017 is likely to be slightly above the revised projections (of 5.2%). The Rwandan economy grew on average by 4.6% in 2017 (first three quarters) driven by the Service sector and – with overall growth of 8% in Q3 – is expected to outpace the projection of 5.2%. Over the medium term, growth is expected to return to its historic rates of 7-8%, as the investments undertaken generate returns and with continued improved performance in exports. Rwanda’s performance at end-2017 confirms the projected rebound and establishes a solid foundation for further upward trends in 2018. With the good agriculture performance of end-year, it is likely that Q4 repeats (or slightly surpasses) the performance of Q3 – the strongest performance in recent years. In that case, real GDP growth will be slightly better than projected, likely at about 5.42% (compared to 5.2% projected). This strong performance is likely to extend into Q1 of 2018. Rwanda’s GDP growth rate is one of the strongest in the East African Community (EAC). Across EAC and Sub-Saharan Africa (SSA), public investment and fiscal deficits, especially in the context of slower growth, are contributing to rising risk of debt distress. Rwanda’s debt remains sustainable and in line with Government of Rwanda’s fiscal consolidation. End year inflation is also likely to be between 2% and 3%, below the revised projections (of 4%). In total, inflation has averaged 4.8% in 2017 and core inflation in terms of annual changes recorded 2.0% in December compared to 2.6% in November of 2017. For the annual average, core inflation stood at 3.9% in December, down from 4.2% recorded in November of 2017. Since June 2017, Rwanda has had the lowest inflation rate in the EAC.

3.2. Fiscal Policy Outlook for FY 2017/18 and Medium-Term 2017 and 2018 are on track to support the implementation of the government’s medium-term fiscal policies: (a) Fiscal and debt sustainability with progress toward the EAC macroeconomic convergence criteria, (b) Reducing the external current account deficit and the reliance on external financing, (c) Further improving prioritization and efficiency of public expenditure, in support of growth, poverty reduction and structural current account improvement. FY 2017/18 domestic revenue and grants is FRW 1766.5 billion, 70% from tax revenue. Revenue policies are aimed at offsetting, at least partially, the impact of exemptions aimed at boosting domestic import substitution industries (“Made in Rwanda”), notably by enhanced tax administration, and improved collection at the local government level. The FY 2017/18 projection of domestic revenue and grants is FRW 1766.5 billion, of which FRW 1229.6 billion will come from tax revenue, FRW 184.1 billion in non-tax, and FRW 352.9 billion from grants.



FY 2018/19 is projected to see an increase in overall domestic revenue and grants: FRW 1929.1 billion in which tax and non-tax respectively will be 1373.6 billion and FRW 180.4 billion and FRW 375 billion from grants. With this, government is assessing new tax policy changes and administrative measures that will boost the revenue mobilization. For FY 2017/18, it is projected that total expenditures and net lending will be FRW 2092.4 billion, divided into current expenditure FRW 1144.8 billion, transfers FRW 402.7 billion, capital spending FRW 769.6 billion, and net lending FRW 178 billion. For FY 2018/19, total expenditure and net lending are projected at FRW 2314.7 billion with current expenditure. Growth in current expenditure and net lending will be constrained to below GDP growth. Development spending remains focused on completing projects under way or in the pipeline, in line with EDPRS 2 objectives and envisaging contribution to growth.

The fiscal deficit including grants remain to be in the policy range between 3.5- 4 percent of GDP; it is projected to be fully financed by budget and project loans on highly concessional terms and allow the government to build up net banking assets. Over the 2015-2018, net domestic financing is projected to be close to zero as percentage of GDP, thus allowing maximum room for private sector credit and investment.

3.3.Monetary and Financial Policy Outlook In FY 2017/18, the favorable global economic situation with supportive financial conditions, rising commodity prices and expanding world trade will impact Rwanda through higher export revenues, leading to downward pressure on the inflation and depreciation rates, forecasted at 5.0% and 3.0% respectively. This will provide the necessary conditions for the BNR to continue pursuing an accommodative monetary policy stance in order to improve the financing of the economy through the banking sector. The strengthening economic performance is expected to contribute to financial stability in the new fiscal year. The beneficial external factors are anticipated to improve the debt servicing capacities of both individuals and companies. The BNR plans to engage with banks and MFIs on improving loan appraisal standards in order to provide resistance against the recent increase in the ratio of NPLs. Consequently, this is expected to lead to an increase in the interest income of banks due to a rise in private sector lending with fewer NPLs. Furthermore, the BNR expects to continue improving consumer protection standards by drafting new laws and facilitating a transparent comparisons of costs between different financial institutions. By incorporating the Financial Intelligence Unit into the BNR, this is projected to strengthen the Anti-Money Laundering and Combating Financial Terrorism structure and instruments. Lastly, the growth in e-money transactions has led to initiatives to improve the monitoring and enforcement of E-money regulations in order to protect public funds.

3.4.External Sector Outlook The external position is expected to continue to strengthen over the medium term. In 2017, the current account deficit is expected to narrow more than previously anticipated to 8.8 percent of GDP, reflecting, in part, observed strong export performance. The headline current account deficit is expected to widen temporarily in 2018, to 10 percent of GDP, due to imports associated with the construction of Bugesera



Airport. But, excluding the impact of Bugesera, positive export trends and more modest import growth are expected to support the continued narrowing of the current account deficit to around 7.6 percent of GDP by 2019. Together, with a gradual increase in financial flows, these current account improvements should support a continued recovery in external buffers — gross official reserves are projected to reach 4.3 months of prospective imports by 2019.

3.5. Regional Integration Outlook Rwanda considers regional economic integration as one of the crucial elements of achieving Vision 2020. It will be necessary to pursue an open, liberal trade regime, removal of barriers to trade as well as implementing policies to encourage FDI. Rwanda is a full member of three key regional economic blocks: the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), and the Economic Community of the Great Lakes Countries (CEPGL). These blocks are at different stages of integration and Rwanda is currently dealing with a tripartite agreement including the EAC, COMESA and SADC with the purpose of resolving issues surrounding overlapping membership. In terms of progress made, the EAC is at the most advanced stage, and Rwanda has significantly deepened its integration with the EAC. Currently, three stages of the process, the customs union (since July 2009) and common market (since July 2010), and monetary union (since November 2013) protocols, are being implemented and allow people, capital and goods to move freely within the region. During 2016/17, for example, several projects have been fast trucked through Northern Corridor Integration Projects (NCIP), such as Immigration, Trade, Tourism, Labour and Services, Single Customs Territory, Commodity Exchanges, Mutual Defense Cooperation, Mutual Peace and Security Cooperation and Airspace Management, and then Power Generation and ICT. Addition to these projects, Partner states are implementing macro convergence criteria already set in the East Africa monetary union protocol which will allow establishing the single currency in the region. Meanwhile, bills establishing EAMI, EACB, EASB, and relevant institutions are being negotiated by partner states. Furthermore, Rwanda is expecting to benefit from the reduction of transaction costs for businesses, thereby improving the incentive to invest in Rwanda.



CONCLUSION Rwanda’s GDP growth rate is one of the strongest in the East African Community (EAC). Across EAC and Sub-Saharan Africa (SSA), public investment and fiscal deficits, especially in the context of slower growth, are contributing to rising risk of debt distress. Rwanda’s debt remains sustainable and in line with Government of Rwanda’s fiscal consolidation. Across Sub-Saharan Africa, economic conditions are rebounding, due to a variety of factors. In Rwanda, in FY 2016/17 GDP grew by 3.4%, down from 8.6% in FY 2015/16 due to completion of major infrastructure investments projects, like the Kigali Convention Centre, leading to a decline in the construction sector, and a bad agriculture harvest due to drought. In FY 2017/18, leading indicators show a continued improvement of economic activities. Growth in 2017 is projected at (more than) 5.2 percent, and 7-8 percent in the out years, markedly higher than projected growth in EAC countries and across Sub-Saharan Africa. Rwanda’s projected growth rates are set to exceed the average for the region. Strong and inclusive GDP growth, sustained over an extended period, is at the heart of Rwanda’s ambitions. Over the medium term, Rwanda plans to drive growth through: Higher agriculture productivity and growth; Export diversification and import substitution through Made in Rwanda; A diversified industrial base, moving into light manufacturing, logistics, and domestic production; Services, built on public spending, credit growth and private consumption; and Addressing bottlenecks in project implementation to ensure investments yield stronger returns to

the economy.

Documents

THE ANNUAL ECONOMIC REPORT FISCAL YEAR 2016/2017 … · Rwanda Annual Economic Report Fiscal Year 2016/2017 Ministry of Finance and Economic Planning Macroeconomic Policy Division