Rwanda Plans to Deepen Debt Management Reforms

Rwanda’s economy remained strong in 2015, with a GDP growth rate of 6.9 percent, steered by strong construction and services activity, mostly undertaken by the public sector. This is despite a decline in mining exports by almost half that emanated from the drop in global commodity prices, leading to a significant decline in foreign exchange earnings. The decline in export earnings, combined with tighter conditions for private inflows and appreciation of the US$, led to a 7.5 percent depreciation of the Rwandan franc during the year, and a sharp drawdown of official reserves. The current account deficit worsened to 18.1 percent of GDP in 2015, from 16.4 percent a year earlier. Consumer price inflation, however, remained stable, averaging 2.5 percent during the year. Monetary policy remained largely accommodative through end-2015 but was tightened in the first quarter of 2016. Nevertheless, macroeconomic policy performance through December 2015 remained favourable and was supported by structural reforms, notably improved domestic revenue collection, reduced liquidity overhangs, and strengthened financial market supervision.

To address external imbalances, the Government reinforced policies including promoting export diversification, import substitution and exchange rate flexibility. These were complemented by fiscal and monetary tightening. These policies are expected to reduce imports by about 15 percent over 2016-2017, thus averting a more precipitous decline in reserves. However, economic growth is projected to reduce modestly to 6.0 percent in 2016 and 2017 before picking up to 7.0 percent in 2018 and beyond.

As in most former HIPCs, Rwanda’s public debt has been increasing both in nominal terms and as a percent of GDP from about US$1.2 billion (or about 21 percent of GDP) in 2010 to about US$2.6 billion (or about 33 percent of GDP) at the end of June 2016. Both external and domestic borrowing to finance infrastructure projects contributed to this increase of debt. From the preliminary analysis of the existing debt stock as at end June 2016, the portfolio is exposed to refinancing risk emanating mainly from domestic debt, with 58 percent of debt maturing within one year while the average time to maturity is 3.4 years. The dominance of foreign currency debt, which accounts for 78 percent as at end of June 2016, exposes the portfolio to exchange rate risk. However, the portfolio is not exposed to interest rate risk as all the debt instruments are in fixed rate.

Recognising the costs and risks associated with the growing debt burden, the Government initiated some reforms on public debt management, including consolidation of public debt management functions within a newly established Debt Management Unit in the Ministry of Finance and Economic Planning (MINECOFIN). These reforms are partly based on the findings and recommendations of the debt management performance assessment mission that visited the country in July 2015. To consolidate the reforms, MINECOFIN invited the World Bank to assist in developing a Debt Management Reform Plan. In this regard, a joint MEFMI/World Bank mission visited Kigali, Rwanda, from 5 to 14, July 2016.

The main objective of the mission was to assist the MINECOFIN design a reform plan for public debt management in Rwanda as well as build capacity for formulation of a debt management strategy, preparation of annual borrowing plan, and development of domestic debt markets. The mission team comprised Ms. Lilia Razlog (Team Leader) and Ms. Zeljka Sedlo – both from the World Bank, Mr. Michel Vaugeois and Ms. Joanne Perez (both World Bank consultants) and Mr. Lekinyi Mollel from MEFMI.

The mission team together with Authorities drafted public debt management reform plan with a log frame of actions to be implemented in the short and medium term. In addition, the mission imparted knowledge and skills on how to design and implement a debt management strategy, annual borrowing plan, and introduction to development of the domestic debt markets.

The reform plan focuses on issues related to the development of the debt management strategy, government borrowing and related activities, debt statistics bulletin and domestic debt markets development. Particularly, the reform plan has four main pillars: (1) Development and implementation of a debt management strategy and benchmarks; (2) annual borrowing plan formulation and analysis of borrowing proposals; (3) domestic debt market development; and (4) publication of debt statistics bulletin and reporting. A list of activities have been identified to address the identified gaps in each of the four pillars of the reform plan. The plan also indicates the resources, internal or external, required to implement the activities, as well as the expected outcomes. The MINECOFIN will proceed immediately with implementation of some of the reforms, as indicated in the agreed log-frame, including updating the debt management strategy.