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RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK INTRODUCTION 1. Economic performance in 2011 has been strong, albeit facing challenges arising from a difficult external environment brought up by sovereign debt issues in the Euro area and rising fuel and food prices. Real output growth stood at 8.6 percent, from 7.2 percent the year before driven mainly by a good harvest, strong domestic demand and a boom in construction. While inflation rose sharply, reaching 8.3 percent at end December 2011 from 0.2 percent a year earlier, it remained the lowest in the region. Revenue collection for the first half of the fiscal year at end December 2011 met forecasts and spending was broadly on track, while the overall fiscal balance was in a higher surplus than expected – on account of higher donor disbursements. A larger than expected surplus in the external position was recorded, from strong exports performance, increased tourism receipts, and large public and private capital inflows. 2. Looming Euro area recession risks and a slower global economic recovery in general continue to weigh on Rwanda’s economic outlook. While growth will remain robust, it is projected to slowly decelerate in 2012 to around 7.7 percent owing to the negative outlook on the global economy, and mainly as a result of higher international oil prices and declining export commodity prices. Fiscal consolidation through increased revenue mobilization and expenditure prioritization will remain the key components of the fiscal strategy aiming to close the fiscal gap and gradually reduce aid dependency. Domestic economic policies will be geared all through the year and beyond at sustaining robust economic growth while maintaining macroeconomic stability by keeping a close eye at inflation developments and external competitiveness. RECENT ECONOMIC DEVELOPMENTS 3. Good agriculture and industry performance contributed to robust output growth in 2011. Real GDP growth for 2011 was initially projected at 7 percent, slightly lower than the 7.2 percent achieved in 2010, anticipating adverse effects from rising food and fuel prices and then revised upward to 8.8% in October 2011. However, estimates for 2011 put real GDP growth at 8.6 Page 1 of 6 18.0 15.0 9.0 Real GDP Growth, annual percent change 8.5 8.0 12.0 7.5 9.0 7.0 18 6.5 6.0 3.0 0.0 8 6 1 2009 8 5 9 9 5 6.0 5.5 5.0 2010 2011 Agriculture Industry Services Real GDP (right) percent. This growth was mainly achieved with a strong 18 percent growth performance from the industry sector, led by the construction, mining, chemicals and non-metallic minerals sub sectors – mining grew by an impressive 49 percent while growth in construction was 24 percent. The agriculture sector with a good season ‘B’ food crop harvest maintained a strong growth of 5 percent, the same as was achieved in 2010. Services growth at 9 percent was mainly driven by wholesale and retail trade, finance and insurance and public administration sub-sectors – wholesale and retail trade growth was at a remarkable 10 percent while that of public administration was 15 percent. All sectors of the economy are currently performing well. In the area of agriculture, the good weather conditions and the positive impacts of the crop intensification program have contributed to a good season “B” harvest and a high contribution of agriculture to growth. Growth in the industrial and service sectors are being driven by the increase in private and public investments in key infrastructure. The construction sub sector is registering a boost from expansion in domestic credit as well as flows of external finances. The services sector is also booming with improved financing of the private sector, significant contributions to growth from the finance and insurance sub-sectors resulting from new entrants in the markets and increased profitability, and improved public service delivery. Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Percent 4. Consumer price inflation remains in the single digit and the lowest in the region. Inflation rose sharply in 2011, but remained in single digits reaching 8.3 per cent at end December 2011 from 0.2 percent at end December 2010. The good season “B” harvest in food crops and the lower prices for transport and fuel reflecting the implementation of the reduction in fuel taxes during the year contributed to CPI Inflation, end 12.0 of period percent the recent decline in inflation. Headline 10.0 change Inflation stood at 8.18 percent in March, 8.0 from 7.85 percent in February and 7.81 6.0 percent in January 2012. Inflation in the first 4.0 two months of the year was driven by food 2.0 and non-alcoholic beverages amounting to 0.0 5.4 percent of headline inflation owing to increased prices for vegetables and cereals. Communication price indices fell for six Overall Inflation Local Inflation consecutive months, reflecting increasing Imported Inflation competition in the telecommunication industry. In February 2012, domestic inflation contributed to 6.65 percent of headline inflation against 1.2 percent imported. In the EAC countries, inflation continued to rise throughout 2011 and the first two months of 2012 on account of high oil and food prices as well as the drought in the horn of Africa. Despite the sharp rise of inflation in Rwanda, it still remains below the Page 2 of 6 levels of regional peers – inflation as of end March 2012 stood at 21.2 percent in Uganda, 24.5 percent in Burundi, 19.4 percent in Tanzania (February figure), and 15.6 percent in Kenya. 5. Fiscal performance in the first half of fiscal year 2011/12 ending December 2011 was broadly on track. Fiscal performance was satisfactory despite challenges in the resource area stemming from uncertainties concerning disbursements of donor support funds that complicated government cash flow management, and administrative delays in the implementation of capital projects. Domestic revenue collections for the first half amounted to RwF 284.2 billion with tax revenue collection at RwF 5.6 billion higher than the projected, reaching RwF 258.6 billion by the end of December – driven mainly by higher direct taxes especially PAYE (Pay As You Earn) collections and consumption taxes (excise duties and VAT). Non-tax revenue collection at RwF 25.6 billion fell short of projections of about RwF 5.8 billion due to lower collections from administrative fees and charges as well as dividends. By end December, total provisional spending for the first half of fiscal year 2011/2012 had reached RwF 480.4 billion compared to projections of RwF 524.2 billion for this period. Whilst total recurrent spending at RwF 298.5 billion exceeded projections by RwF 11.3 billion, capital spending at RwF 198.6 billion was RwF 53.2 billion lower than projected. Excess spending on recurrent expenditures was mainly due to regularization of teachers’ salaries and frontloading of transfers from RLDSF (Rwanda Local Development Support Fund) in districts for the implementation of various projects and programs. Lower spending, particularly on capital expenditures was due to administrative delays in the completion of payment documents and tender requirements. The overall fiscal balance for the first half of the fiscal year 2011/2012 was higher than projected, standing at a positive balance of RwF 99 billion (about 2.4 percent of GDP), and leading to a buildup of deposits in the banking system of RwF 173.6 billion. This performance reflected the accrual of higher budget support funds (loans and grants) as well as the lower total spending – budget support that accrued to the budget up to December 2011 amounted to RwF 210.9 billion with the World Bank and the UK as the largest donors (US$ 57.5 million and US$ 49.1 million respectively), while budget loans disbursed amounted to RwF 53.4 billion. 6. Fiscal performance for the remainder of fiscal year 2011/12 augurs well, with spending that has started picking up and good revenue performance. Since the beginning of the year, there has been an acceleration of spending under goods and services and capital expenditure, as the bottlenecks that delayed spending have been resolved. Provisional tax revenue collection for the first quarter 2012 were RwF 145.1 billion compared to RwF 120.5 billion for the same period in 2011. Total revenue collection for the whole 2011/12 fiscal year is projected at around RwF 565.1 billion (about 13.8 percent of GDP) while donor disbursements in the form of budget support and project support is projected at around RwF 463.5 billion (about 11.3 percent of Page 3 of 6 GDP). Total expenditures are projected by end June 2012 to reach RwF 1.1 trillion (about 26.9 percent of GDP) with recurrent spending projected at around RwF 596.3 billion and capital spending at around RwF 508.6 billion. The resulting overall fiscal balance (including grants) is projected to be in deficit of around RwF 77.1 billion (about 1.9 percent of GDP). 7. A larger than expected balance of payments surplus in 2011 resulted from robust exports performance and large public and private capital inflows. Total exports of goods in value terms showed a strong growth of 56 percent in 2011 compared to 2010 led by minerals exports. At the same time, total imports of goods also in value terms rose sharply by 44 percent in 2011 compared to 2010. This sharp growth was due to a large surge in capital goods imports responding to the investment requirements for growth as well as higher outlays for energy products reflecting the high prevailing world oil prices. As a result of these developments, the trade deficit widened by about 40 percent in 2011 compared to 2010. The services and income balances improved, mainly from an increase in tourism receipts and the AirTel (telecom) license fee. Current transfers, including from the Global Fund, also increased sharply resulting in only a marginal deterioration of about 10 percent in the current account deficit in 2011 compared to 2010. Both public and private borrowings increased in 2011 compared to 2010, reflecting ongoing implementation of some public strategic investment projects as well as private sector projects in the transportation, communication, real estate and coffee sectors. As a result of this performance in the capital and financial accounts the overall balance of payments closed with a surplus of US$ 233.5 million in 2011 compared to a surplus of US$ 72.1 million in 2010. Gross international reserves increased and reached coverage of about 7 months of imports. ECONOMIC OUTLOOK – 2012 AND BEYOND 8. Real GDP growth in 2012 is projected to remain robust, albeit lower than in 2011 on account of bleak prospects in the global economy. Real GDP is projected to grow by 7.7 percent in 2012, lower than the 8.6 percent achieved in 2012. Agriculture is projected to grow at 6.5 percent, slightly higher than the 5 percent recorded in 2011, lead by a growth in the food crops sub-sector projected at 6 percent and that of export crops (coffee and tea) projected at 22 percent. The industry and services are projected to grow by 11 percent and 8 percent respectively mainly driven by construction, manufacturing of food and furniture sub-sectors in the industry, and wholesale retail and trade, finance and insurance, education and health subsectors in the services. 9. The fiscal program for the 2012/13 fiscal year and the medium term seeks to deepen fiscal consolidation. Fiscal consolidation will be the key component of the fiscal strategy, through increased domestic revenue mobilization and expenditure prioritization to further anchor macroeconomic stability and support growth. Page 4 of 6 10. Over the medium term, domestic revenue will be expected to rise on average by 0.3 percent of GDP per annum and reach 14.9 percent of GDP by 2015/2016. Projections for external resources are guided by the uncertainties in donor grant commitments in the two outer years of the medium term. Total budget support grants are expected to decline in the medium term and reach 7.2 percent of GDP by 2015/2016. Total outlays in the medium term are projected to decline by 3.3 and 0.9 percent of GDP respectively in 2013/14 and 2014/15 to reach to 23.7 percent of GDP by 2015/2016. Mirroring these projections the overall fiscal balance deficit (including grants) is projected to decline from 2.6 percent of GDP in 2012/2013 to 1.6 percent of GDP in 2015/2016. 11. The external sector continues to be strong despite lower export commodity prices, higher energy prices and downside risks on the global economy. While exports increased robustly in 2011 compared to 2010, they are projected to increase by about 1 percent in value terms for the whole of 2012 on account of projected lower export commodity prices adversely affecting Rwanda exports. For coffee and tea, volume increases of 41 percent and 10 percent respectively are projected whilst prices will decline by 27 percent and 7 percent respectively in 2012. In the case of minerals, volume of exports is projected to rise by 11 percent even though a 6 percent decline in prices is expected. Imports on the other hand are projected to increase by about 14 percent in value terms in 2012 consistent with the investment needs of the country but also owing to higher projected energy import prices. The current account deficit is projected to widen by about US$ 240.5 million in 2012 compared to 2011. Net capital flows including public and private borrowings to finance ongoing public and private investment projects cover the current account gap and allow a small overall balance of payment deficit. Gross reserves at end 2012 are projected to remain at comfortable levels (5 months of imports). The country’s external sector performance in the medium term will be influenced by the results of the comprehensive export strategy as well as global financial developments including behavior of commodity prices. 12. Monetary policy will aim at maintaining stable inflation while insuring adequate financing of the economy to support growth. The central bank (NBR) aims at tightening monetary policy in 2012. Inflation is targeted at 7.5 percent in 2012 (end period), with the aim of gradually reducing it to 6.5 percent in 2013, 5.5 percent 2014 and to return to 5 percent in the medium term. Broad money and Reserve Money growth is projected to slow down from 26.8 percent and 23.4 percent respectively in 2011 to 17 percent in 2012. Similarly, the credit to the private sector growth is projected at 18.4 percent in 2012, from 27.9 percent in 2011. However, the risks of higher inflation remain due to uncertainties related to exogenous shocks, including food and fuel prices. The NBR stands committed to further tighten monetary policy to Page 5 of 6 maintain a low level of inflation whilst ensuring adequate provision of credit to the private sector to promote the required growth. Growth in monetary aggregates is expected to be in line with nominal GDP growth. STATISTICAL APPENDIX RWANDA - SELECTED ECONOMIC AND FINANCIAL INDICATORS 2009 2010 I. National Accounts Real GDP Agriculture Industry Services Inflation end of period period average 6.2% 7.7% 1.3% 6.3% 7.2% 5.0% 8.4% 9.0% 5.7% 10.3% 0.2% 2.3% II. External Accounts Export of Goods, f.o.b annual percent change of which Coffee and Tea Minerals Imports, f.o.b annual percent change of which Capital Goods Energy Goods Trade Balance Services and Income of which Tourism Remittances inflows Current Transfers of which Public Transfers Current Account Balance( Incl Transfers) Capital Transfers Financial Account of which Foreign Investments Long Term Public Borrowing (net) Overall Balance 234.9 -12% 85.5 55.4 997.0 13% 372.4 178.0 -762.1 -218.4 174.5 88.1 604.0 531.7 -372.5 200.0 233.5 118.7 81.4 57.0 1 III. Fiscal Accounts Total Revenue and Grants percent of GDP Domestic revenue percent of GDP Tax revenue Non Tax revenue Total Grants percent of GDP Total Expenditures and Net Lending percent of GDP Current Expenditures percent of GDP Capital Expenditures percent of GDP Overall Balance, payment order basis including grants percent of GDP excluding grants percent of GDP Financing Foreign, net percent of GDP Domestic, net percent of GDP 800.7 25.6% 391.4 12.5% 376.4 15.0 409.3 13.1% 804.0 25.7% 459.1 15.6% 459.1 10.1% -3.3 -0.1% -412.6 -13.2% 14.7 26.1 0.8% -9.7 -0.3% 2012 2011 Proj. est. (annual percent change) 7.7% 8.6% 6.5% 4.7% 11.3% 17.6% 8.3% 8.9% 2014 Proj. 7.5% 6.6% 8.8% 7.8% 7.2% 6.6% 9.1% 7.2% 7.5% 7.9% 6.5% 7.0% 6.0% 6.5% (million $US, unless otherwise specified) 466.9 464.2 297.3 1% 56% 27% 141.8 138.5 111.8 142.0 151.4 67.9 1,778.4 1,563.8 1,084.0 14% 44% 9% 765.6 465.3 357.6 406.4 345.6 210.8 -1,311.5 -1,099.6 -786.7 -329.9 -242.5 -292.1 276.0 251.8 201.6 171.7 166.2 98.2 939.3 880.6 657.4 815.6 757.6 580.0 -702.1 -461.5 -421.4 206.3 196.7 285.6 486.0 485.2 213.7 181.4 137.5 63.7 169.7 206.6 51.9 -9.7 233.9 72.1 492.2 5% 152.6 147.3 1,771.9 -0.4% 737.8 418.9 -1,279.7 -332.5 317.5 178.4 853.4 727.7 -758.7 251.1 416.0 130.3 238.1 -91.6 514.0 4% 163.9 143.5 1,841.4 4% 801.0 317.5 -1,327.4 -322.1 365.0 185.3 759.6 633.3 -889.9 230.6 499.0 125.5 209.0 -155.1 (billions of Rwanda francs, unless otherwise specified) 1,360.8 1,206.6 1,028.6 863.4 24.9% 25.4% 25.1% 24.8% 781.0 665.7 565.1 484.3 14.3% 14.0% 13.8% 13.9% 754.8 641.2 519.7 463.7 26.2 24.5 45.4 20.6 579.8 540.9 463.5 379.0 10.6% 11.4% 11.3% 10.9% 1,521.4 1,331.0 1,105.6 984.3 27.8% 28.0% 26.9% 28.2% 782.0 679.9 596.3 527.0 14.7% 14.5% 14.5% 15.7% 782.0 679.9 596.3 527.0 13.1% 13.5% 12.4% 12.6% 1,376.0 22.2% 903.5 14.6% 874.0 29.5 472.5 7.6% 1,520.5 24.5% 857.8 14.5% 857.8 10.1% -160.6 -2.9% -740.4 -13.5% 168.6 168.6 3.1% 0.0 0.0% -144.5 -2.3% -617.1 10.0% 151.5 151.5 2.4% 0.0 0.0% unless otherwise specified) 636.5 661.8 671.8 431.0 251.6 110.9 -141.0 -171.5 -223.6 750.4 601.5 509.8 25% 18% 28% 14.7% 13.6% 13.4% 1,067.5 913.4 780.7 17% 17% 27% 21% 21% 21% ---------- 5,110 5,829 -120.9 -3.5% -500.0 -14.3% 132.8 68.5 2.0% 58.0 1.7% (billion RwF, IV. Monetary Accounts 519.0 441.8 Net Foreign Assets 97.0 85.3 Net Domestic Assets -131.3 -141.3 Credit to the Government (net) 397.1 357.3 Credit to the Private Sector 11% 4% annual percent change 12.2% 12.1% percent of GDP 615.9 526.6 Money Supply 17% 13% annual percent change 19% 18% percent of GDP Memo Items 3,257 2,964 Nominal GDP (billion Rwf, calendar year) Source: MINECOFIN, NISR, RRA and BNR staff estimates and projections. 1 2013 Proj. 8.3% 5.6% -77.1 -1.9% -540.5 -13.2% 88.7 116.6 2.8% -28.0 -0.7% 3,801 The fiscal accounts are on fiscal year - 2009 stands for 2009/10, 2010 for 2010/11 and so on. Page 6 of 6 -124.4 -2.6% -665.3 -14.0% 132.4 119.6 2.5% 12.8 0.3% 4,409