IMF says Rwanda is economic success story
Today the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Rwanda.
Rwanda has been an economic success story. Real gross domestic product (GDP) growth averaged above 8 percent per year in the last decade; inflation has been subdued since 2009; foreign reserves have been kept at adequate levels; poverty based on the household living conditions survey declined from about 57 percent in 2005/06 to below 45 percent in 2010/11; and income inequality declined notably.
Macroeconomic developments have been generally favorable this year. The Rwandan economy grew by 8.6 percent year-on-year in the first half of 2012, driven by the construction and services sectors. Headline inflation declined to 5.4 percent in October 2012, mainly in response to slowing import prices for food and petroleum products while core inflation was down to 2.5 percent.
The current account deficit has widened due to strong import growth and delays in aid inflows. Exports of goods and services have remained strong in 2012, as rising mineral exports and markedly higher tea prices have more than offset lower prices for a number of traditional exports, including coffee. Meanwhile, imports have increased rapidly, driven by higher imports of capital goods and materials for the construction sector. Moreover, aid delays have resulted in lower official transfers. As a result, the current account deficit (including aid inflows) has widened and, for 2012, is estimated to reach 11.3 percent of GDP.
Fiscal consolidation continued in the July 2011-June 2012 fiscal year. The overall fiscal deficit (cash basis, after grants), was 0.7 percent of GDP lower than targeted, as a result of greater-than-projected revenue and lower spending. The higher revenue reflected higher income tax revenue due to unexpectedly large clearance of arrears, as well as higher revenue from taxes on goods and services and international trade (boosted by higher imports). On the spending side, higher-than-budgeted current spending, mainly on wages and salaries, was more than offset by underexecution of domestically-financed capital expenditures.
The monetary policy stance has been tightened since mid-2012, following an extended period of accommodation. Against a background of rapid growth in broad money and credit to the private sector in the first half of the year, the National Bank of Rwanda ( NBR) raised its key repo rate (policy rate) in May 2012 by 50 basis points (to 7.5 percent) and increased the use of repo operations to mop up excess liquidity. As of end-October, the exchange rate had depreciated by 3.7 percent since the beginning of the year.
The macroeconomic outlook remains generally favorable, provided delays in budget support disbursements are temporary. For the whole of 2012, real GDP growth is projected at about 7.7 percent, easing compared to the first half of the year because of weaker agricultural output and lower-than-planned government spending caused by delays in some budg- et support disbursements. Growth is expected to be sustained at 7.6 percent in 2013, driven by an expansion in services and construction, and to stabilize at around 7 percent over the medium term. Inflation is projected to continue its convergence toward the authorities’ mediumterm target of 5 percent per year.
Risks to the outlook arise mainly from possible cutbacks in aid and a more challenging global environment. Staff estimates indicate that a prolonged delay in the delivery of budget support could lower growth in 2013 by 1½ percentage points and possibly more, depending on the magnitude of second round effects.