Language: English Original: English

PROGRAMME : Poverty Reduction Strategy Support

Programme (PRSSP-III) COUNTRY : RWANDA

APPRAISAL REPORT Date: March 2009

Appraisal Team

Team Leader Team Members Sector Manager Sector Director Regional Director

Charles Muthuthi, Chief Financial Economist, OSGE.2 Leonard Rugwabiza, Macroeconomist, RWFO Chukwuma Obidegwu, Consultant, OSGE.2 Marlène Kanga, OSGE.2 Gabriel Negatu, OSGE Aloysius Uche ORDU, OREA

Peer Reviewers

Pietro Calice, Senior Investment Officer, OPSM Loxly Epie, Senior Financial Management Specialist, ORPF.2 Wilberforce Mariki, Senior Country Economist, ORSA Carlos Mollinedo, Senior Country Economist, ORSB Jian Zhang, Principal Macroeconomist, ONRI

TABLE OF CONTENTS

Page

Currency Equivalents, Acronyms and Abbreviations, Grant Information…………………………ii-iv Executive Summary ................................................................................................................................ v Results Based Logical Framework .......................................................................................................vii

I. THE PROPOSAL ................................................................................................................................ 1

II. COUNTRY AND PROGRAMME CONTEXT................................................................................. 1 2.1 Government’s Overall Development Strategy And Medium-Term Reform Priorities.............. 1 2.2 Recent Economic And Social Development, Perspectives, Constraints And Challenges ......... 2 2.3 Bank Group Portfolio Status ...................................................................................................... 6

III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY......................................... 6 3.1 Link With The CSP, Analytical Underpinnings And Country Readiness Assessment ............. 6 3.2 Collaboration And Coordination With Other Donors................................................................ 7 3.3 Outcomes And Lessons From Past Similar Operations ............................................................. 7 3.4 Relationship To Other Bank Operations.................................................................................... 8 3.5 Bank’s Comparative Advantage ................................................................................................ 9 3.6 Application of Good Practices Principles On Conditionality .................................................... 9

IV. THE PROPOSED PROGRAM AND EXPECTED RESULTS ....................................................... 9 4.1 Programme’s Goal And Purpose ............................................................................................... 9 4.2 Programme’s Pillars, Operational Objectives And Expected Results ..................................... 10 4.3 Financing Needs And Arrangements ....................................................................................... 16 4.4 Beneficiaries Of The Programme ............................................................................................ 17 4.5 Impact On Gender.................................................................................................................... 17 4.6 Environmental Impact.............................................................................................................. 17

V. IMPLEMENTATION, MONITORING AND EVALUATION...................................................... 17 5.1 Implementation Arrangements................................................................................................. 17 5.2 Monitoring And Evaluation Arrangements.............................................................................. 18

VI. LEGAL DOCUMENTATION AND AUTHORITY ..................................................................... 19 6.1 Legal Documentation............................................................................................................... 19 6.2 Conditions Associated With Bank’s Intervention.................................................................... 19 6.3 Compliance With Bank Policies .............................................................................................. 20

VII. RISKS MANAGEMENT.............................................................................................................. 20

VIII. RECOMMENDATION ............................................................................................................... 21 Appendix I: Letter of Development Policy ............................................................................................................. 22 Appendix II: Operation Policy Matrix for Poverty Reduction Strategy Support Programme (PRSSP-III) .......... 31 Appendix III: Comparative Socio-Economic Indicators......................................................................................... 35 Appendix IV: Attainment of the MDGs and National Development Targets ........................................................ 36 Appendix V: Macroeconomic Framework – Summary Indicators, 2008-2011/2012............................................ 37 Appendix VI: Analytical Underpinnings for the Poverty Reduction Strategy Support Porogramme III .............. 38 Appendix VII: ADB’s Portfolio in Rwanda............................................................................................................ 39 Appendix VIII: IMF Country Relations Note ......................................................................................................... 40 Appendix IX: Map of the Project Area ................................................................................................................... 44

TECHNICAL ANNEXES – Available Separately

Page BOXES Box 1: Impact of the Global Economic Crisis on Rwanda’s Economic Prospects 4 Box 2: Summary of Lessons Learnt 8 Box 3: Purpose of PRSSP-III 10 GRAPHS Graph 1: Recent Economic Outcomes 2 Graph 2: Human Development Index 5 TABLES Table 1: Selected Economic Indicators 3 Table 2: Balance of Payments 3 Table 3: 2009 Ease of Doing Business (Africa) 11 Table 4: Selected PFM Performance Scores for Rwanda 13 Table 5: PRSSP III Required Prior Actions (By End March 2009) 16 Table 6: Financing Government Expenditures 16

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Currency Equivalents

As of March, 2009

1 Unit of Account (UA) = RWF 852.428 1 Unit of Account (UA) = USD 1.46736 I USD = RWF 580.926

Fiscal Year

January 1, 2009 - June 30, 20091 July 1 - June 30

Weights and Measures

1 metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = 2200 lbs 1 metre (m) = 3.28 feet (ft) 1 millimetre (mm) = 0.03937 inch 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres

1 Rwanda became a member of the East African Community (EAC) on 1 July, 2007 after acceding to the EAC Treaty on 18 June 18, 2007. Accordingly Rwanda's current budget calendar will change beginning 2009. The 2009 mini-budget that will run from 1 January to 30 June, 2009 will enable the country to transition to the EAC budget calendar that runs from 1 July to 30 June.

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Acronyms and Abbreviations

AfDB African Development Bank BNR Central Bank of Rwanda BSHG Budget Support Harmonization Group CEDP Competitiveness and Enterprise Development Project CPAF Common Performance Assessment Framework CSP Country Strategy Paper DBR Doing Business Report DBSL Development Budget Support Loan DFID Department for International Development (UK) DRC Democratic Republic of the Congo EAC East African Community EDPRS Economic Development and Poverty Reduction Strategy ESW Economic and Sector Work EU European Union FDLR Forces Democratic de Liberation du Rwanda FSDP Financial Sector Development Program FRA Fiduciary Risk Assessment GBS General Budget Support GDP Gross Domestic Product GNI Gross National Income GoR Government of Rwanda HDI Human Development Index IDA International Development Association (World Bank) IFMIS Integrated Financial Management System IMF International Monetary Fund IPPIS Integrated Payroll and Personnel Information System JBSR Joint Budget Support Review MDG Millennium Development Goals MINEDUC Ministry of Education MINECOFIN Ministry of Finance and Economic Development MINICOM Ministry of Commerce, Trade and Industry MIFOTRA Ministry of Public Service and Labour MOU Memorandum of Understanding MTEF Medium Term Expenditure Framework OAG Office of Auditor General OBL Organic Budget Law ODA Official Development Assistance PCR Programme Completion Report PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PRGF Poverty Reduction and Growth Facility (IMF) PRSG Poverty Reduction Support Grant (IDA) PRSP Poverty Reduction Strategy Papers PRSSP Poverty Reduction Strategy Support Programme RADDEX Revenue Authorities Digital Data Exchange RDB Rwanda Development Board RIEPA Rwanda Investment and Export Promotion Agency RPPA Rwanda Public Procurement Authority RRA Rwanda Revenue Authority RWFO Rwanda Field Office (of AfDB) UA Unit of Account

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Grant Information

Client’s Information RECIPIENT: Government of Rwanda EXECUTING AGENCY: Ministry of Finance and Economic Planning Financing Plan

Source Amount (Million UA)

Share (%)

Instrument

ADF

30.30 8%

Grant

DFID 156.74 39% Grant World Bank 105.63 27% Grant EC 70.47 18% Grant SIDA 17.72 4% Grant Germany 10.50 3% Grant Netherlands 6.27 2% Grant TOTAL COST

397.63

Timeframe - Main Milestones (expected)

Concept Note Approval

December, 2008

Project Approval May 2009 Effectiveness May 2009 Last Disbursement May 2010 Completion December 2010 Last Repayment N/A

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Executive Summary Programme Overview:

Program Title: Poverty Reduction Strategy Support Program (PRSSP) III Geographical Scope: Rwandan National territory Expected Outputs: • Enhanced business climate for private sector growth

• Broader access to credit • Strengthened public financial management practices

Overall Timeframe: 2 years, January 2009 to December 2010 Programme Cost: UA 397.63 million

Programme Description: Rwanda’s Economic Development and Poverty Reduction Strategy (EDPRS) covering the period 2008-2012 sets the country’s developmental objectives, priorities and policies for the next five years. The EDPRS is fully supported by country level stakeholders, including development partners and assigns high priority to accelerating private sector-led growth. PRSSP-III is aligned to the Bank’s Country Strategy Paper, 2008-2011. Further, it contributes to the strategic outcomes of the following two flagship programs of the EDPRS: (i) Growth for Jobs and Exports; (ii) Governance. The third flagship program of the EDPRS is, Vision 2020 Umurenge, that aims to reduce inequality and poverty. Programme Outcomes and Beneficiaries: PRSSP-III’s expected outcomes include: (i) improved Rwanda’s ranking in “Doing Business” index; (ii) deeper access to credit by the private sector; and (iii) enhanced financial governance as reflected in improved Public Expenditure and Financial Accountability (PEFA) scores. The primary beneficiaries of the programme include Rwandese entrepreneurs, especially small and medium-sized enterprises (SMEs), and the private sector. Needs Assessment: Budgetary grants, that are projected at about 11 to 17 percent of Rwanda’s GDP during the fiscal years 2009 to 2010/11, will continue supporting the emerging dynamism of the agricultural sector, and promoting spending in priority social sectors, thus fostering progress towards the realization of the MDGs. The ADF Grant of UA 30.3 (US$ 44.46)2 million has been taken into account in the Government’s Budget Framework, 2009 – 2011/12, to close the financing gap (see table, above). Bank’s Added Value: The Bank has so far successfully provide Rwanda with two budget support operations that were developed collaboratively with the Government, donors, and other country level stakeholders. Further, the Bank was the lead donor for the Budget Support Group from January to June 2008, and is currently playing an active role in the government-donor dialogue in several policy areas, including public financial management. The Bank brought to bear this cumulative level of experience during the design of PRSSP-III. Importantly, during the implementation this operation, the Bank will fully mobilize its internal capabilities to actively engage the Government and other donors during the Joint Budget Support Reviews and in the preparations of joint analytic studies/reports.

Institutional Development and Knowledge Building: To enhance knowledge of Rwanda’s developmental challenges and priorities the Bank’s Rwanda Country Office will through PRSSP-III intensify the Bank’s policy dialogue at country level. Lessons learned will then inform Bank 2 Based on the March 2009 UA/US$ rate of 1.46736

Government Financing (US$ Million) S1 2009 2009/10 Financing Gap 409 698 Budgetary Grants 263 391 (of which, AfDB = 33 12) Project Grants/Loans 141 303 Source: MINECOFIN & Bank staff estimates

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Group’s advisory services to Rwanda as well as lead to better design of operations across the wide range of Bank’s portfolio in the country. Finally, to foster shared learning, the Bank’s Country Office will document the lessons learned, and disseminate the results Bank-wide through a variety of channels, including seminars and newsletters. Risks and Mitigation Measures:

Risks: Risk Mitigation Measures: Risk #1: Political risk due to instability and conflict in eastern DRC.

Internally, Rwanda remains secure and politically stable. Rwanda and DRC are working with the international community to resolve the crisis.

Risk #2: Macroeconomic risks due to inflationary pressures late 2008 caused by rising world food and fuel prices, and debt sustainability concerns due to the country’s low exports base.

Working with the IMF the Government has taken steps to curtail the recent surge in inflation, and it adopted in 2008 a comprehensive debt management strategy.

Risk #3: Risk related to the impact of the global recession.

A committee is in place that is advising the Government on measures to be undertaken to manage the impact of the global recession.

Recommendation: It is recommended that the Board of Directors approve the proposal of a Grant not exceeding UA 30.3 million from the resources of the ADF-XI in the form of general budget support based on the conditions stipulated in this report.

vii

POVERTY REDUCTION STRATEGY SUPPORT PROGRAMME (PRSSP-III) Results Based Logical Framework3

HIERARCHY OF

OBJECTIVES EXPECTED RESULTS

REACH PERFORMANCE INDICATORS

INDICATIVE TARGETS TIMEFRAME

ASSUMPTIONS/RISKS

1. Goal: Contribute to economic growth and poverty reduction.

Impact: Sustained rapid economic growth Accelerated poverty reduction

Beneficiaries: Rwandese population

Impact Indicators: (1) GDP growth rate Source: MINECOFIN Reports Method: Supervision Mission (2) Percentage (%) share of population below poverty Source: National Institute of Statistics of Rwanda’s Household Living Conditions Survey (EICV) Method: Supervision Mission

Progress Anticipated In The Long Term: (1) 2009-2011/2012 GDP growth average is sustained at 6% (in the backdrop of the global recession), compared to 7.2% in the 2003-2008 period (2) From 2006 to 2012, the proportion of people whose income is less than 1 dollar a day, pass from 56.9% to 46%.

Assumption Statement: Assumptions

Political stability is maintained in the Great Lakes sub-region

Macroeconomic stability is maintained Global economic slowdown eases

Mitigation Political stakeholders in the region are engaged

to continue to promote peace; Memorandum of Understanding (MOU) for budget support bind parties to promote peace and security

Rwanda is on track with IMF’s PRGF; Alignment of donor budget support flows with GoR budget has improved

Government is monitoring the impact of global recession and is taking corrective measures

2. Programme Purpose: (A) Create an enabling environment for private sector development by enhancing the business climate, and deepening access to credit

Outcomes: Business climate is enhanced

Beneficiaries: Rwandese entrepreneurs (especially SMEs) and population

Outcome Indicators: (1) Ranking in “Doing Business” Source: World Bank’s “Doing Business Report” Method: Supervision Mission (2) Volume of credit to private sector Source: BNR Monetary Survey Method: Supervision Mission

Progress Anticipated In The Medium Term:

(1) Improve ranking in “Doing Business Report” by 13 positions to 145 by December 2010 from 158 in 2006. (2) Credit to the private sector increases to 12% of GDP by December 2010 from 10% in 2006

Assumption Statement: Risks Inadequacy of implementation of reform measures

to ease constraints on the private sector Deepening of the global recession leading to

decline in external finance inflows to Rwanda Mitigation

• GoR has good track record of implementing reforms, and is committed to the reform agenda

Rwanda’s integration in the global financial system is low

3 See Appendix II: Operation Policy Matrix for Poverty Reduction Strategy Support Programme (PRSSP) III for the complete range of policy measures supported under this programme.

HIERARCHY OF OBJECTIVES

EXPECTED RESULTS

REACH PERFORMANCE INDICATORS

INDICATIVE TARGETS TIMEFRAME

ASSUMPTIONS/RISKS

viii

2. Programme Purpose: (B) Improve governance of public finances by strengthening public financial management and procurement practices

Outcomes: Public financial management (PFM), including procurement, is enhanced

Beneficiaries: Rwandese population, the private sector, and government agencies

Outcome Indicators: (1) PEFA index (2) Proportion of the value of procurement tendered competitively or justified Source: Budget; Reports by PEFA, RPPA, IPPS, IFMIS, and OAG Method: Supervision Mission

Progress Anticipated In The Medium Term: (1) From 2007 to December 2010, the following PEFA scores, pass from C+ to B-: (i) Index for multiyear perspective in fiscal planning, expenditure policy, and budgeting; and (ii) Index on quality and timeliness of annual financial statements (2) From 2006 to December 2010 the proportion of the value of procurement tendered competitively or justified pass from 73% to 80%

Assumption Statement: Risks Low retention of skilled PFM staff within the

public sector Mitigation This programme includes measures to support

capacity building in all PFM areas During the implementation of this

programme, the World Bank, DFID, and EU are supporting capacity building in PFM through a Multi Donor Trust Fund.

3. Inputs and Activities: FINANCING

ADF

UA 30.3 Million

(Million

US$) DFID 230 IDA 155 EC 103.4 SIDA 26 Germany 15.4 Netherlands 9.2

Outputs: (1) Strategies to improve business and investment climate are implemented

Beneficiaries: MINICOM; RRA

Output indicators: (1.1) Bills on Companies, Contracts, Secured Transactions, Business Registration and Insolvency is approved (1.2) RADDEX system to ease cross-border trade with Tanzania and Uganda is implemented Source: World Bank’s “Doing Business Report”, MINICOM and RRA Reports, and donor backed reform program reviews under CPAF Method: Supervision Mission

Progress anticipated in the short term: (1.1) Bills on Companies, Contracts, Secured Transactions, Business Registration and Insolvency adopted by Cabinet by March 2009 (1.2) The RADDEX system to ease cross-border trade with Tanzania and Uganda is successfully implemented by June 2010

Assumption statement: Risk:

• Bank and other donor resources may not be available for the implementation of measures under the programme

Mitigation: • A MoU binds the behaviour of parties

during the implementation of this, joint programme

• The programme incorporates prior actions to drive technical conditions prior to Board approval

HIERARCHY OF OBJECTIVES

EXPECTED RESULTS

REACH PERFORMANCE INDICATORS

INDICATIVE TARGETS TIMEFRAME

ASSUMPTIONS/RISKS

ix

(2) Financial

Sector Development Plan is implemented

Financial Sector Development Program (FSDP) Secretariat

(2.1) Regulatory framework for national payments systems, credit bureau, and secured transactions (2.2) Establishment of private credit reference bureau (2.3) Loan guarantee program for commercial banks’ lending to SMEs. Source: BNR Monetary Survey, and donor backed reform program reviews under CPAF Method: Supervision Mission

(2.1) Legal and regulatory framework for national payments systems, credit reference bureau, and secured transactions is adopted by Cabinet, by June 2009 (2.2) Private credit reference bureau is established by December 2009 (2.3) A loan guarantee program for commercial banks to increase lending to SMEs is established by June 2010

(3) Public Financial Management follow international best practices

Government agencies (Budget Unit, MIFOTRA, Public Account Unit, OAG, Treasury, and RPPA)

(3.1) Adoption of PFM Reform Action Plan (3.2) Implementation of PublicBooks (accounting) software under IFMIS (3.3) Proportion of Government expenditures independently audited (3.4) Publication of independent review (appeal) panel report (3.5) Implementation of the Public Investment Policy Source: Budget; Reports by PEFA, RPPA, IPPS, IFMIS, MINECOFIN, and OAG, donor backed reform program reviews under CPAF Method: Supervision Mission

(3.1) Adoption by Cabinet and publication of the PFM Reform Action Plan, 2008–2010 by March 2009 (3.2) PublicBooks software rolled out to all budget agencies and integrated to IPPS by December 2010 (3.3) From 2006 to December 2010 the percentage of expenditure audited by OAG pass from 50% to 60% (3.4) Publication, by March 2009, of the 2008 annual report of the independent panel addressing appeals by contractors of public procurement decisions (3.5) Approval by Cabinet of the Public Investment Policy by April 2010

Risk:

• Reform measures as articulated in the PFM Reform Action Plan are not implemented

Mitigation: • Donors are setting up a basket fund for

supporting the implementation of activities under the PFM Action Plan

1

REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP TO THE BOARD OF DIRECTORS ON A PROPOSED GRANT TO RWANDA FOR

THE POVERTY REDUCTION STRATEGY SUPPORT PROGRAMME III

I. THE PROPOSAL 1.1 I submit the following Report and Recommendation on a proposed grant to Rwanda for UA 30.3 million to finance the Poverty Reduction Strategy Support Program (PRSSP) III. It is a general budget support operation, and will be implemented over two years from January 2009 to December 2010. The programme was appraised in January 2009. It results from a request of the Government during the 2008 Joint Budget Support Review (JBSR). PRSSP-III is aligned with Rwanda’s Economic Development and Poverty Reduction Strategy (EDPRS), 2008-2012, and the Bank’s Country Strategy Paper (CSP), 2008-2011 that was adopted in November 2008. Donors endorsed the EDPRS in September 2008. The design of this programme took into account good practice principles on conditionality and the Bank Group’s non-concessional debt accumulation policy. 1.2 The programme purpose is to contribute to the strategic outcomes of two EDPRS flagship programmes: Growth for Jobs and Exports, and Governance, as articulated in the CSP. Its operational policy objectives are to: (i) create an enabling environment for private sector development by enhancing business environment and deepening access to credit; and (ii) improve governance by strengthening public financial management and procurement practices. Its expected outcomes include: improved Rwanda’s ranking in “Doing Business” index; broad access to credit by the private sector; enhanced Public Expenditure and Financial Accountability (PEFA) scores; and improved transparency of public procurement.

II. COUNTRY AND PROGRAMME CONTEXT 2.1 Government’s Overall Development Strategy And Medium-Term Reform Priorities 2.1.1 Rwanda’s Vision 2020 document, that was completed in 2000 after consultations with several stakeholders, envisages the country as a middle-income economy with a healthier and better educated population, with life expectancy increasing to 55 years, full literacy, and a per capita income of US$ 900 by 2020. Consistent with this Vision, Rwanda’s current medium-term Economic Development and Poverty Reduction Strategy (EDPRS), covering the period 2008 to 2012, emphasizes on a dynamic and innovative private sector, rapid knowledge and skill acquisition, good governance, and a responsive and effective public sector as key instruments for economic transformation. Since 2004, donors, through the Development Partners Coordination Group (DPCG), the Budget Support Harmonization Group (BSHG), and Sector and Cross Sector Clusters have been involved in preparatory consultations and joint review of the implementation of the EDPRS through the biannual joint budget support reviews. Such coordinated actions are fostering complementarities among donors in their support for the implementation of the EDPRS. 2.1.2 Taken together, the EDPRS’ three flagships programmes - Sustainable Growth for Jobs and Exports; Vision 2020 Umurenge (a decentralized social protection scheme); and Governance - propose a comprehensive agenda of economic growth favouring the poor that is underpinned by good governance, and that provide a roadmap for Rwanda to achieve the Millennium Development Goals (MDGs) by 2015. The Sustainable Growth for Jobs and Exports flagship aims to boost growth by enhancing competitiveness, private sector investment and innovation, agricultural productivity, exports, and information and communication technology (ICT) competences. These require measures to lower the costs of doing business,

2

including enhancement of technical skills and promotion of education in science and technology to alleviate the shortage of skilled labour and to enhance private sector innovation and productivity. Other priorities include improving economic infrastructure, promotion of the adoption of modern technologies and deepening the financial sector. The second flagship, Vision 2020 Umurenge, aims to address extreme poverty and vulnerability, particularly in the rural areas. It has three components: (i) public works to create off-farm employment and the building of community assets; (ii) development of cooperative, and small and medium-sized enterprises (SMEs) to foster entrepreneurship; and (iii) provision of social services and assistance to landless families that are unable to participate in public works programs. Finally, the Governance flagship focuses on: maintenance of peace and security; improved relations with all countries; promotion of national unity and reconciliation; justice, human rights and the rule of law; and decentralization, public financial management and service delivery. It complements ongoing programs aimed at creating well-defined property rights, business friendly regulations, efficient public administration, and the elimination of corruption. 2.1.3 Rwanda’s medium-term outlook on inflation, economic growth, and fiscal financing, are favourable. Broadly, the International Monetary Fund (IMF)’s fifth review of Rwanda’s Poverty Reduction and Growth Facility (PRGF), in November 2008, assessed the medium-term macro-economic framework to be sound and adequate to support the Government’s reforms under the EDPRS (see Appendix VIII: IMF’s Country Relations Note). 2.2 Recent Economic And Social Development, Perspectives, Constraints And Challenges 2.2.1 Economic Developments: Rwanda’s US$ 3.1 billion economy (World Bank, 2007) did not achieve a 6-7 percent growth rate, during the period 2002-2006, as projected in the its first PRSP (2002-2005). Nevertheless, economic growth began to accelerate to 7 percent annually during fiscal years 2006 and 2007, and was estimated to surpass 8 percent in 20084, but because of the negative impact of the global recession it will weaken to 6 percent in 2009 (see Graph 1 and Table 1). A key driver to the surge in economic activity has been the large infusion of Official Development Assistance (ODA) to Rwanda and the buoyant activity in the agriculture, construction, and services sectors. Agriculture and services sectors contributed 36 percent and 50 percent, respectively, in nominal GDP in 2007, with the later growing steadily at an average of 9 percent annually during the period 2003-2007. The construction sector (6 percent of GDP) has been growing at 10 percent annually during the last decade, and with the scaling up of public investments it will remain a major contributor to growth and employment. Transport, communications, and tourism are other key drivers of economic growth. With the expanded East African Community (EAC), there is vast potential for growth in the agro-processing oriented manufacturing sector that is currently small, comprising 14 percent of nominal GDP (2007). However, sustained growth in this sector would require the Government to take measures to stimulate higher private sector investments and to improve productivity and competitiveness.

4 During the period 1995-2002, Rwanda’s economy grew annually by 10 percent due to reconstruction activity

and structural reforms required after the 1994 genocide. Economic growth slackened to 5 percent annually during the period 2002-2006, mainly because the agricultural sector performed poorly.

Graph 1. Recent Economic Outcomes

0

1

2

3

4

5

6

7

8

9

10

1999 2000 2001 2002 2003 2004 2005 2006 2007

Rea

l GD

P G

row

th R

ates

(%)

0

200

400

600

800

1,000

1,200

1,400

GD

P pe

r C

apita

(US$

)Rwanda : Rea l GDP Gro wth Rates (%) (le ft s ca le )Afric a : Rea l GDP Gro wth Rates (%) (le ft s ca le )Rwanda : GDP per Capita (US$ ) (right s ca le )Afric a : GDP per Capita (US$ ) (right s ca le )

Source: ADB Statistics Department, 2008.

3

2.2.2 The Rwanda’s economy experienced a surge in inflation from an annual average 9.1 percent in 2007 to an estimated 15.1 percent by end of 2008, due to rising world food and energy prices, and domestic demand pressures fuelled by fiscal expansion and large inflows of foreign exchange (see Table 1). The IMF’s fifth review of the PRGF concluded that with a combination of the GoR’s tight monetary policy measures and the decline of international commodity prices, inflation would decline to single digit level in the second half of 2009. Further, coordination of fiscal and monetary policies and improved liquidity forecasting and management would help to ease inflationary pressures.

Table 1: Selected Economic Indicators 2008 (Est.) S1 20095 (Proj.) 2009/10 (Proj.) 2010/11 (Proj.) Real GDP Growth (%) 8.5% 6.0% 6.0% 7.8% Inflation (% CPI, Annualized) 15.1% 7.7% 7.0% 5.3% Domestic Revenue as % of GDP 13.9% 15.4% 13.0% 13.3% External Grants as % of GDP 13.1% 17.3% 11.7% 11.0% Expenditure as % of GDP 27.4% 32.6% 25.6% 30.1% Overall Fiscal Balance (incl. grants) -0.4% 0.1% -1.6% -0.7%

Source: MINECOFIN, IMF and Bank Staff Projections (see Appendix V) 2.2.3 Rwanda’s fiscal stance has remained expansionary with public expenditures rising substantially in recent years, from 20 percent of GDP in 2000 to 26 percent in 2007, due to the need to rapidly reconstruct the country and improve public services. Investments grew rapidly, financed by increasing domestic resource mobilization and growth in external assistance. The key expenditure policy of the EDPRS is to shift resources towards public investments and priority expenditures including human resource development and infrastructure, and consequently squeeze out expenditures related to public administration and defence. Capital expenditure is projected to increase from 11 percent of GDP in 2008 to 12 percent of GDP in 2009/2010, while recurrent expenditures are planned to decline from 16 percent of GDP to 14 percent of GDP over the same period. The overall fiscal deficit, after grants, is projected at about 2 percent of GDP by 2009/2010 (see Table 1). 2.2.4 The recent medium-term expenditure framework envisages that expenditures as a proportion of GDP would peak in 2008/2009 while the tax base will continue to widen and increase domestic resource mobilization, by 0.2 percent of GDP per annum, thus gradually reducing aid dependency. Since the establishment of the Rwandan Revenue Authority in 1997, substantial progress has been made in increasing government revenues, from 11.4 percent of GDP in 2001 to 13.6 percent in 2007, and was estimated at 13.9 percent in 2008. Dependence on international trade taxes has been significantly reduced and VAT, personal, and corporate taxes have become important domestic revenue sources. 2.2.5 In the external sector despite Rwanda’s revenues almost tripling between 2003 and 2007 (2007: US$ 170 Million; 2003: US$ 63 Million) its current account deficit (including official transfers) deteriorated significantly between 2007 and 2008 (see Table 2). The main cause of the deterioration of the current account balance is the worsening of the trade and services accounts due to Rwanda’s high demand for imports of capital goods.

5 Semester One 2009: January to June

Table 2 Balance of Payments 2007 2008 (Proj.)

2009 (Proj.)

External sector (annual percentage changes) Export of goods, f.o.b. (US$) 20.1 25.4 6.2 Imports of goods, f.o.b. (US$) 30.2 43.9 5.9 Terms of trade (deterioration = -) 13.7 -4.4 -3.7 Current a/c balance (incl. official transfers

-4.9

-7.1

-8.2

Sources: IMF

4

2.2.6 A rapid deterioration of Rwanda’s debt dynamics over the medium-term could emerge from exogenous shocks to exports or imprudent borrowing on non-concessional terms, a World Bank’s Debt Sustainability Analysis (DSA) of end-June 2008, observed. This could threaten Rwanda’s external debt position that had declined, as a proportion of GDP, from 70.7 percent in 2005 to 16.7 percent in 2006, thanks to the enhanced Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief, initiatives. In response, the Government has developed a comprehensive debt management strategy that will drive future public sector borrowing needs. 2.2.7 The IMF is concerned that the risks of contagion from the deteriorating external environment were on the rise for Rwanda, although the medium-term macro-economic outlook remains favourable. Currently, the overall impact of the global financial crisis on Rwanda has been manageable because of the limited integration of the economy to the international financial markets. However, the deepening of the ongoing global recession is likely to slow down Rwanda’s high GDP growth performance through the negative impact on ODA, Foreign Direct Investment (FDI), remittances, and the performance of the banking sector (see Box 1).

Box 1: Impact of the Global Economic Crisis on Rwanda’s Economic Prospects Because of the continued global recession, Rwanda’s economic growth rate projection for 2009/2010 has been revised downwards to 6 percent from an initial projection of 7.4 percent6. Investment activity and growth of the tourism and construction sectors are expected to slow down leading to lower GDP growth. Weaker external balances will emerge if flows of ODA, FDI, and remittances slacken. Rwanda’s inward remittances amounting to $21 million in 2005, accounted for 0.8 percent of GDP in 20067. Reductions in remittances could exacerbate the current liquidity constraints on the commercial banks and slow down expansion of private sector credit and investment. Although to date donors have confirmed their commitments to Rwanda and therefore no major cuts in ODA is expected, continued global recession beyond 2010 may lead to decline in ODA funding that could impend the implementation of the planned programs of investment. The Bank is supportive, and has frontloaded by 24% or UA 7.15 million, PRSSP-III’s first disbursement tranche. A slackening of economic growth could lead to vulnerability of banks because of rising credit risks. This may undermine the present strength of the banking sector where presently, all 8 commercial banks are well capitalized, and comply with the minimum capital requirement of FRW 5 billion. To manage the impact of the global financial crisis on Rwanda, the Government has constituted a committee comprising representatives MINECOFIN, NBR, commercial banks, insurance and microfinance institutions. It is too early to make an assessment whether the measures the GoR has taken are adequate to mitigate the negative impact of the global economic recession. Nevertheless, measure taken in the 2009 mini-budget and that aim to limit contingent spending, and to save for future use the revenues that exceed estimates will have positive effects on the 2009 fiscal deficit. Finally, on the monetary policy front, NBR has committed itself to maintaining flexibility of the exchange rate as a key instrument of managing inflationary pressures. 2.2.8 Looking ahead, the IMF recommend that the Government would need to implement structural reforms that will foster increased investment, expand private sector participation, broaden financial sector, and a diversify productive and export base. Further, the Government would need to take measures to increase real interest rates to positive levels. Finally, decisive actions would need to be taken to implement the Public Investment Programme and the Financial Sector Development Plan if Rwanda is to realize gains of an expanded productivity base and lay a solid foundation for sustainable growth, in the longer-term. 2.2.9 Governance: Although Rwanda is internally secure and politically stable, with an all inclusive Government as required by the 2003 Constitution, its external sub-regional political dynamics are not so favourable. The Legislative Elections in September 2008 received 6 The latest growth rate projections have assumed that the global economy will begin to recover in 2009

enabling the Rwandan economy to resume its rapid growth in 2010. However, these projections are continually being reviewed as the global economy evolves.

7 See International Organization for Migration at: http://www.iom.int/jahia/Jahia/pid/381

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positive assessments from International Election Observers. Further, the political tensions and conflicts within the Great Lakes Region have receded in recent years although such conflicts had resurfaced in eastern Democratic Republic of Congo (DRC). The Government’s Decentralization Policy is the basis for sustainable governance reform in the countryside. A considerable amount of flexibility has been built into the system, including service charters/citizen contracts in some provinces to form the basis for monitoring and accountability. 2.2.10 The Government has a policy of zero tolerance for corruption and allegations regarding public officials are routinely investigated and brought to the courts. Rwanda ranks better than its EAC neighbours in 2008 Transparency International’s Corruption Perception Index as well as on the 2008 Ibrahim Index of African Governance. Finally, a 2008 Joint Governance Assessment (JGA) by donors and the Government, and a recent Bank’s own Governance Profile concluded that progress has been made by Rwanda to strengthen governance but much more needs to be done in the area of institutional strengthening. 2.2.11 A major area of governance reforms in Rwanda is Public Financial Management (PFM) where reforms have focused on capacity building for accounting, auditing and procurement functions, and management of public investment at various levels of government. A Public Expenditure and Financial Accountability (PEFA) assessment, completed in October 2007, and a Fiduciary Risk Assessment (FRA) conducted by DFID and the Bank in 2008, found Rwanda’s PFM systems to be sound, although challenges remain. To overcome institutional capacity constraints, the Government recently developed a PFM Action Plan covering a wide range of reforms including strengthening budget management, accounting, fiscal reporting, auditing, and procurement systems. 2.2.12 Social and Human Development: While Rwanda’s social indicators remain weak, substantial progress has been made since the late 1990s in many areas including gender equality, adult literacy, enrolments in primary and secondary education, primary health services, and the prevention of the spread of HIV/AIDS (see Graph 2). The share of women in positions of influence (including the Cabinet and Parliament) is now about 40 percent, and net enrolment in primary education has risen to about 90 percent, with parity between boys and girls. Immunization rates for children are among the highest in the sub-region. The incidence of HIV/AIDS has recently been estimated to be about 3 percent in adults, much lower than the previous estimates8. 2.2.13 Appendix IV shows that Rwanda is on track to meet many of the targets, under the Millennium Development Goals (MDG) 2: achieve universal primary education; MDG 3: promote gender equality; MDG 4: reduce child mortality; and parts of MDG 6: combat AIDS, malaria and other diseases, and will very likely meet targets under MDG 7: ensure environmental sustainability. However, the challenge of meeting the MDGs on inequality and the eradication of extreme poverty and hunger, is huge. Overall poverty incidence and extreme poverty between 2000/2001 and 2005/2006 declined moderately from 60.4 percent to 56.9 percent and 41.3 percent to 36.9 percent, respectively, and the Gini coefficient rose from 0.47 to 8 A year 2000 estimate of 11 percent HIV prevalence rate among adults was not rigorous. It was an extrapolation from seropositivity among hospital patients.

Graph 2. Human Development Index

Rwanda

Central Africa

0.36

0.37

0.38

0.39

0.40

0.41

0.42

0.43

0.44

0.45

0.46

1998 1999 2000 2001 2002 2003 2004 2005

Rwanda Central Africa

Source: ADB Statistics Department, 2008

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0.51. The recent acceleration of economic growth, particularly in the agricultural sector, and the adoption of social protection programs under the EDPRS, are expected, with donor support, to contribute to progress in this area. 2.3 Bank Group Portfolio Status 2.3.1 As at end-December 2008, the Bank Group total commitments (net of cancellations) in Rwanda amounted to UA 180.9 million for 13 operations, with no persistent generic problems across the portfolio of projects and programmes (see Appendix VI). A comprehensive assessment of the Bank’s portfolio in Rwanda as part of the CSP preparation process revealed a significant improvement in the quality of the portfolio as reflected in a sharp increase in the disbursement ratio, which stood at 50.8% in June 2008 compared to 12.1% in November 2005. The Bank has undertaken two general budget support operations in Rwanda. The Programme Completion Report (PCR)’s for these operations - PRSSP I, and PRSSP II - each concluded that the respective objectives were substantially met. III. RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY

3.1 Link With The CSP, Analytical Underpinnings And Country Readiness Assessment 3.1.1 Link with the CSP: The proposed budget support operation is in line with both the EDPRS and the Bank’s strategic goals including those in the CSP. The Bank’s CSP for Rwanda (2008-2011) focuses its support on the Growth for Jobs and Exports flagship of the EDPRS and has two pillars: (i) economic infrastructure, covering transport, energy, ICT, water and sanitation; and (ii) competitiveness and enterprise development, including the development of the skills for science, technology, and innovation. The CSP emphasizes on the need to raise private sector productivity and competitiveness. Further, it proposes a combination of instruments, including direct budget support and project investment lending, to support three strategic objectives of the EDPRS, namely: (i) creating an enabling environment for private sector growth; (ii) reducing the cost of doing business; and (iii) broadening access to financial services. 3.1.2 The EDPRS, supported by earlier studies and surveys, made the case that infrastructure services, the regulatory environment, and inadequate financial services were serious constraints to the Growth for Jobs and Exports. Easing these constraints requires (i) regulatory and financial sector reforms to enhance private sector development; and (ii) effective management of public investments in infrastructure, knowledge and skills development as well as overall public expenditures. The Bank’s CSP and this programme, have been designed with these objectives in mind. Further, these Bank instruments were developed to respond to the Government’s preference for untied budget support, as evidenced in its Aid Policy Paper, to ensure that public expenditures are aligned to the priorities of the EDPRS. 3.1.3 Country readiness for budget support: Rwanda has a stable and democratic government based on constitutional power sharing by different political formations. The Government has prioritized maintenance of macroeconomic stability and the successfully concluded IMF’s PRGF review in November 2008 noted that the actions it is taking to control the recent surge in inflationary pressures are appropriate. The EDPRS, that is strongly owned by Rwandans, underpins the strategic framework for the medium-term expenditure framework (MTEF) and other policy actions. Rwanda’s Aid Policy provides a framework for a strong partnership between the Government and the donors. An effective donor coordination arrangement, under the auspices of the Budget Support Harmonisation Group (BSHG) is in place.

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The October 2007 PEFA, and the 2008 Fiduciary Risks Assessments by DFID and the Bank (2008) found that Rwanda’s PFM systems have good fiduciary safeguards, and are improving. 3.1.4 Analytical works and underpinnings: A number of analytical works and consultations underpin the proposed budget support operation (see Appendix VI). The EDPRS consultations, the Government’s Aid Policy Paper, and the dialogue with the Government and the other development partners during the Bank’s CSP preparation, have all identified the priorities and modalities for support. The World Bank’s 2007 Country Economic Memorandum and the recent Doing Business surveys have identified the constraints to private sector development and areas requiring urgent attention. The Government undertook wide consultations to prepare a Financial Sector Development Program that is currently under implementation. On the financial governance front, recent analytical works include the 2007 Public Expenditure and Financial Accountability (PEFA) review, the 2008 Fiduciary Risk Assessment, and the wide consultations during the development of the PFM Reform Action Plan. In addition, the IMF has been undertaking regular reviews of economic and financial performance in the context of the PRGF program. Finally, a public expenditure review (PER) exercise that is being conducted by the Bank, World Bank and the Government will play a major role of strengthening the management of public finances during the implementation of PRSSP-III. 3.2 Collaboration And Coordination With Other Donors 3.2.1 Through the Bank’s Rwanda Country Office, the Bank is actively engaged in strong and coordinated dialogue between the Government and donors during the regular meetings of the BSHG. The BSHG, which currently comprises of seven donors is chaired by the Minister for Finance, with a donor co-chair, and provides a forum for Government-donor dialogue on budget support matters. The Bank was the co-chair of this group during the first half of 2008. The BSHG holds two formal review meetings each year (April and September) where budget reforms and performance issues are discussed. The Government, in collaboration with the budget support partners, has developed a Common Performance Assessment Framework (CPAF) to facilitate monitoring the EDPRS outcomes over the period 2008-2012 (see Appendix II). 3.2.2 Besides coordination in the delivery of budget support, the Bank engages other development partners in related areas. As member of the PFM Working Group, the Bank works with the EU, Germany, DFID, the World Bank and the IMF to support the Government in the design and implementation of PFM reforms and to review progress. Further, the Bank collaborates with other partners on analytical work on PFM. The Bank has also collaborated with the World Bank in the design of the Competitiveness and Enterprise Development Project (CEDP) II, and through CEDP-II is working with USAID to strengthen the financial sector through the establishment of a credit reference bureau. Other fora for dialogue that the Bank actively participates in include the annual Development Partners meeting, the bi-monthly meeting of the Development Partners Coordinating Group (DPCG) and several sector working groups, including one for the water and sanitation sector where the Bank is currently the co-chair. Details of this collaborative work are provided in the Technical Annexes. 3.3 Outcomes And Lessons From Past Similar Operations 3.3.1 The Bank’s PRSSP-I supported the Government to lay foundation for enhanced private sector growth, including the development of socio-economic infrastructure, liberalization of trade, and reforms and capacity development in PFM. Under PRSSP-II, reforms targeted improvement in the business climate, development of the exports sector, privatization of state enterprises, and deepening reforms over PFM systems. Thanks to the Bank’s and other donors’

8

interventions, Rwanda has transitioned from post-conflict reconstruction to development, and is making good progress towards meeting the MDGs. Its governance indicators, including those relating to the Country Policy and Institutional Assessment (CPIA) rating, have improved significantly. However, lessons learned from the previous two budget support operations show that much more remains to be achieved before Rwanda can claim to be fully attractive to investors, and to have a fully coherent, modern and effective PFM system. Further, progress was noted to be slow in the implementation of the privatization programme9. The Government is taking decisive action. It has committed itself to accelerating the pace of PFM reforms as it addresses capacity constraints. Further, it is committed to its privatization program once the global financial environment improves, and is pursuing the listing of Government shares in private companies on the newly created Rwanda Stock Exchange. On the Bank’s side, the design of PRSSP-III applies the good practices principles on conditionality (see section 3.6), and draw lessons from the findings and recommendations of the PCRs for the previous operations (see Box 2).

Box 2: Summary of Lessons Learnt PRSSP I to II Lessons Actions Taken

Reduce the number of conditions precedent to disbursements, in line with country implementation capacity

The design of the PRSSP-III covers a selected number of measures that were carefully selected from the CPAF (see Appendix II), that was developed by the Government, collaboratively with donors

The Bank should monitor and supervise budget support operations, more closely

Internal capacity at Rwanda Country Office has been enhanced with a macroeconomist, who is responsible for donor coordination, and who will monitor and supervise PRSSP-III.

To sustain prior reform efforts the Bank should continue supporting reforms over PFM (including procurement) systems

Public financial management remain a key area of focus for reforms by the Government, and PRSSP-III will support this effort (see section IV of this report)

The Bank should engage the Government through dialogue to ensure enhanced implementation capacity for reforms, and to strengthen coordination of donor budget support. Such mechanisms were found to be weak under PRSSP-I & II

The Government has now reinforced monitoring of the EDPRS outcomes through the Common Performance Assessment Framework (see paragraph 3.5.1). A bi-annual Joint Budget Support Review (JBSR) process is now in place, that the Bank will use as a fora to engage the GoR and other donors throughout the implementation of PRSSP-III (see section 5.2)

3.4 Relationship To Other Bank Operations 3.4.1 PRSSP-III provide strong complementarity and linkages across other Bank interventions in Rwanda (see Appendix VII: Bank portfolio in Rwanda). CEDP-II that support the full establishment of the Rwanda Development Board (RDB), the agency responsible promoting exports, investments, and a favourable environment for business, has strong linkages to PRSSP-III’s strategic outcome of enhancing the business climate. One of PRSSP-III’s conditions requires the timely establishment of a credit reference bureau that is the focus of the Bank’s CEDP-II’s capacity building interventions. The Bank’s US$ 30.3 million Grant to GoR in support of the Education Sector Strategic Plan (ESSP), 2006-2010, that aims to enhance human resource capacity for improved business development is complementary to this operation. Other interventions by the Bank in the infrastructure sector (transport, and energy) that aim to reduce the cost of doing business are also complementary to PRSSP-III’s outcomes. Finally, PRSSP-III’s outcomes will have strong linkages with the Fund for African Private Sector Assistance (FAPA)’s grant of US$ 1 million that is enhancing the capacity for business operators in Rwanda.

9 The finalization of the privatization of Banque de Kigali and Rwandaair as envisaged under PRSSP-II was not achieved by the programme’s closure date of December 2008. The process to privatize Rwandaair with advice from the International Finance Corporation (IFC) was concluded unsuccessfully. Further, the ongoing global financial crisis has forced Rwanda to suspend the privatization of the Banque de Kigali.

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3.5 Bank’s Comparative Advantage 3.5.1 The cumulative experience and positive achievements in the course of implementation of the past budget support operations (PRSSP-I and PRSSP-II) within its large portfolio of projects in Rwanda, have provided the Bank with invaluable experience in supporting reforms in the areas of private sector, financial sector development, and financial governance. Indeed, the latter is a key pillar of the Bank’s Governance Strategic Directions and Action Plan 2008-2012. Importantly, the implementation of the PRSSP-I and PRSSP-II have enabled the Bank to establish and maintain good dialogue with the Government and other development partners within the BSHG, that the Bank co-chaired early 2008. During that time, the Bank worked closely with the Government and the other development partners to develop a coordinated mechanism for delivery of budget support assistance in Rwanda that is underpinned by the Common Performance Assessment Framework (CPAF). With PRSSP-III the Bank will continue engaging in policy dialogue, which is expected of it by the Government and the other development partners. 3.6 Application of Good Practices Principles On Conditionality 3.6.1 Reinforce ownership: The Government has established a strong record of engaging a wide range of country-level stakeholders, including civil society and private sector actors and development partners, during the development and the implementation of its poverty reduction strategies at both macro and sector levels. The proposed PRSSP-III is in line with the Bank’s Rwanda CSP (2008-2011) that was developed in close consultation with the Government and other development partners, and that is aligned to the EDPRS. 3.6.2 Coordinated accountability framework: The PRSSP-III is based on a formal Partnership Framework with other development partners through a Memorandum of Understanding (MOU). It reflects the coordinated approach by development partners to disbursement triggers (conditions), amounts of support, and timing of the delivery of assistance in line with the funding needs of the budget and the budget cycle. The Policy Matrix of the PRSSP-III (see Appendix II), is based on the CPAF that was developed collaboratively by the GoR and development partners, and is drawn from the Policy Matrix of the EDPRS. 3.6.3 Select only actions that are critical for achieving results as conditions for disbursement: The triggers for programme disbursement are few and comprise of actions that are achievable and essential to drive outcomes from the Government’s program. Four prior actions have been selected for the disbursement of the first tranche in 2009, and four conditions to satisfy the disbursement of the second tranche in 2010. 3.6.4 Conduct transparent progress reviews conducive to performance based financial support: Reviews of the program will take place in line with the agreed principles of the Partnership Framework between the GoR and the donors supporting the budget. Joint reviews take place twice a year, in April and September and are aligned with the budget cycle. The Bank will participate in those reviews as key requirement for the supervision of the programme.

IV. THE PROPOSED PROGRAM AND EXPECTED RESULTS 4.1 Programme’s Goal And Purpose 4.1.1 The overall goal of the proposed Poverty Reduction Strategy Support Programme (PRSSP) III is to contribute to economic growth and poverty reduction in Rwanda in line

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with the strategic objectives of two flagship pillars of the EDPRS: Sustainable Growth for Jobs and Exports; and Governance. In the medium-term the programme will support Rwanda’s ability to cushion itself from the adverse impacts of the global slow down and to sustain its economic growth rate at an average of 6 percent in the period 2009-2012. Further, because of its focus on outcomes that would benefit the poor, it is expected that the programme will support Rwanda’s EDPRS goal of reducing poverty to 46 percent by 2012, from 56.9 percent in 2006. 4.1.2 The purpose of this programme is twofold: (i) to create an enabling environment for private sector development by enhancing the business climate, and by deepening access to credit; and (ii) to improve governance in public finances by strengthening public financial management (PFM) and procurement practices, as outlined in Box 3.

Box 3: Purpose of PRSSP-III To create an enabling environment for private sector growth by:

• improving Rwanda’s ranking in the World Bank’s “Doing Business Report” by 13 positions to 145 by December 2010 from 158 in 2006

• expanding access to credit by the private sector to 12% of GDP by December 2010 from 10% in 200610 To enhance transparency of PFM system by supporting reforms to:

• improve Rwanda’s PEFA index to B- by December 2010 from C+ in 2007 in key areas of budgeting and financial reporting

• increase the percentage of value of procurement tendered competitively or justified to 80% by December 2010 from 73% in 2006

4.2 Programme’s Pillars, Operational Objectives, And Expected Results 4.2.1 Consistent with the CSP and lessons learned from previous operations, the proposed programme has two pillars: (i) create an enabling environment for private sector development; and (ii) improve governance in public finances. Effective reforms in these two areas provide the critical foundation for productivity growth, competitiveness, and good governance that are critical for achieving Rwanda’s development objectives. The full measures supported by this operation are shown in the Operation Policy Matrix for PRSSP-III that is attached as Appendix II.

• Create an enabling environment for private sector development 4.2.2 To achieve its EDPRS strategic objectives of increasing economic growth and enhancing population development, Rwanda, since 1997, has embarked on a series of reforms that were aimed at enhancing the business and investment climate to achieve gains in the World Bank’s “Doing Business Report” (DBR) rankings. However, evidence show that progress is mixed. 4.2.3 Ranking In “Doing Business Report: The 2008 and 2009 DBRs identify Rwanda as among the top reformers. The DBR 2008 (181 countries were surveyed), ranked Rwanda high (44 out of 181) on enforcing contracts and on procedures for paying taxes (50 out of 181). In the DBR, 2009 (181 countries surveyed), Rwanda is mentioned as a top 10 reformer in dealing with construction permits and in registering property. This is significant progress given the overwhelming task of reconstruction the country faced after years of conflict. Nevertheless, because of shortcomings in the areas of access to credit, protection of investors, trading across boarders, and closing businesses, Rwanda continue to be lowly ranked in the World 10 The forecast on expansion of credit to private during the 2009/2010 fiscal period has marginally been revised

down to 12% from 12.2% as per the estimate in the CPAF (see Appendix II) to mitigate any negative impact that may arise because of the ongoing global recession. Rwanda’s limited integration into the global financial system makes the revised estimate manageable to achieve.

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Bank’s Doing Business surveys (2007: 150 out of 178 countries surveyed; 2008: 148 out of 181; and 2009: 139 out of 181). On the closing business, Rwanda has ranked last on the DBR, 2009 because of the absence of a suitable legal framework on insolvency (see Table 3). Credit information is least available because of lack of a credit reference bureau (see 4.2.7, below). Investors have low protection because shareholder suits are very difficult in Rwanda. Trading across boarders as measured through ease of importation is problematic, and very costly. 4.2.4 The Government has taken action, and currently, bills to revise the company law and simplify company registration, protect investors, and provide a legal framework to close a business are expected to become law by June 2009. This would put in place an insolvency legal framework, which does not exist and where Rwanda has ranked last in DBRs. Adoption of these bills by Rwandese Cabinet is a prior action, by March 2009, under PRSSP-III (paragraph 4.2.20). As outlined in the Letter of Development Policy (Appendix I) these draft bills are currently under validation or are being reviewed by the legislature. 4.2.5 Regarding cross border trade, Rwanda does not control all the factors involved, but it is taking action to streamline trade transactions. A Revenue Authorities Digital Data Exchange (RADDEX) system at the border with Uganda and Tanzania will be implemented to facilitate custom clearance (see Letter of Development Policy in Appendix I). It is expected that once implemented, this system coupled with steps taken to extend the opening hours of custom offices at boarder-crossings and the introduction of a risk-based inspections system, will significantly reduce delays and the costs to importers and exporters. The launch of the RADDEX system is a condition precedent to disbursement of the second tranche under PRSSP-III (see paragraph 6.2.4). 4.2.6 Other measures that the Government has taken to improve its service delivery to the private sector include: (i) the consolidation in 2008 of seven government agencies that serve or regulate the private sector into one entity, the Rwanda Development Board (RDB)11; (ii) establishing the Commercial Registration Services Agency (CRSA), a one-stop shop for all the business registration tasks that were formerly handled by five different agencies; (iii) streamlining land registration transactions through a newly created Office of the Registrar of Land Titles; and (iv) establishing the Rwanda Investment and Export Promotion Authority (RIEPA) to promote investments and exports activities. 4.2.7 Deepening the Financial Sector: The Government is taking important steps to strengthen financial regulations and infrastructure relating to national payments systems and credit reference bureau. This is in response to the comprehensive Financial Sector Development Program (FSDP) that was adopted by the Government in 2006 and that revealed that several challenges need to be overcome for Rwanda to modernize its payment systems, and

11 The entities merged into RDB are Rwanda Investment and Export Promotion Agency (RIEPA), the Rwanda

Information and Communication Technology Agency (RITA), Centre d”Appui aux Petites et Moyennes Enterprises (CAPMER), Rwanda Office of Tourism and National Parks (ORTPN), Rwanda Commercial Registration of Services Agency (RCRSA), Human Resource and Institutional Capacity Development Agency (HIDA), the Environmental Impact Assessment Division of the Rwanda Environmental Management Agency (REMA) and the Privatization Secretariat.

Table 3: 2009 Ease of Doing Business (Africa)

Selected Indicators

Rwanda Ranking

Highest Ranked

(Mauritius) Ease of Doing Business 139 24 Starting a business 60 7

Dealing with permits 90 36

Employing workers 93 64

Registering property 60 127

Getting credit 145 84

Protecting investors 170 11

Paying taxes 56 11

Trading across borders 168 20

Enforcing contracts 48 76

Closing a business 181 70 Source: Doing Business Report, 2009 (World Bank)

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deepen the financial sector. The adoption by the Cabinet, in September 2008, of a National Payments Strategy for improving the payments infrastructure and developing basic payment services was an important and initial step in the launch of a modern payment system for Rwanda. A payments system bill to establish a framework for the BNR’s oversight over key components of the Rwandan payment system was also submitted to Parliament in September 2008. Furthermore, the Cabinet has approved the establishment of a National Payments Council, to oversee the development and operation of modern payments systems. A new electronic payments system will installed that will be managed by a private company, SIMTEL (Sociéte Monetique at de Tele-Compensation au Rwanda), jointly with all the commercial banks. SIMTEL will provide card payment services and automatic teller machines (ATMs) services, some of which are already operational in Rwanda. The modernization of the payments system will include the development of a Real Time Gross Settlement (RTGS) and Automatic Clearing House both of which will be operationalized by 2010. Rwanda is collaborating with institutions in the EAC and the Common Market for Eastern and Southern Africa (COMESA) to ensure compatibility of payments systems. A key priority reform action that is presented in the GoR’s FSDP is the adoption by Cabinet of a subsidiary regulation for the national payments systems, credit reference bureau, and secured transactions. Further, a private credit reference bureau, affiliated to bureaux that are operational in Uganda and Tanzania, has been granted a license (see Letter of Development Policy, Appendix I), and is expected to be operational in Rwanda by the end of 2009. The establishment of the private credit reference bureau is a condition precedent to disbursement of the second tranche under PRSSP-III (paragraph 6.2.4). 4.2.8 Despite these actions, access to financial services in Rwanda is limited, with an estimate of only 3 percent of the population having access to services offered by commercial banks12. Factors constraining access to finance by the private sector were identified in the FinScope Rwanda 2008 survey (funded by DFID) that highlighted serious weaknesses including a narrow and shallow financial system and undiversified financial products. Recent reforms in this area include licensing new private banks, and divestiture and restructuring of state-owned banks. In 2007, the minimum capital base of the commercial banks was increased sharply, and has given the banks the capital base to expand credit to the private sector. A national microfinance law that establishes the legal and regulatory framework for the operation of MFIs has been adopted and a microfinance policy and implementation strategy approved. A micro-finance apex organization has been established and is providing advice and capacity development services to MFIs and their clients. Looking ahead, the Government envisages the establishment of a cooperative savings bank/microfinance institution in every sector (village) to promote saving mobilization and the use of financial services. There are plans to introduce a loan guarantee programme on commercial bank lending to SMEs in Rwanda. Resources are being mobilised to support broader access to credit by SMEs. In this regards, a MoU between BNR and the Ministry of Agriculture, Livestock and Forestry (MINAGRI) for the implementation of a US $10 million final phase the Rural Investment Facility was signed in December 2008. 4.2.9 Oversight over the non-bank financial institutions and capital markets has been strengthened through amendments of the BNR Act. An over the counter market was established with important rules and regulations, and a national education programme on the benefits of capital markets executed. A formal mid-term review of the FSDP is planned by end-2009 to explore possibilities of expanding reforms to other areas, including rural and health insurance schemes.

12 Access to banking services in Rwanda rises marginally to 9 percent when services of savings and credit

cooperatives, through the Union de Banque Populaire (UBPR), are considered.

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• Improve governance of public finances

4.2.10 A key strategic priority of the EDPRS is to enhance gains through governance, with special emphasis on required improvements in the quality of public financial management systems, and the related institutional and human capacity developments. Recent PFM actions have included the adoption of a revised Organic Budget Law, a new procurement code, and the establishment of the Rwanda Public Procurement Regulatory Agency (RPPRA). Other measures covered the strengthening of governance oversight institutions, the development of systems and capacity for monitoring budget flows, public accounting and financial reporting, and internal and external auditing of government agencies both at central and local government levels. A fiscal decentralization framework that provides for transfers of grants from the central government to the districts is now in place. Although there has been good progress in PFM reforms, thanks to the Bank’s previous two budget support operations, substantial challenges remain to be tackled. To consolidate gains achieved so far, the Government’s reform agenda in this area aims to enhance the quality of public expenditure management, as reflected in progress on the PEFA index scores (see Table 4). Key reform areas include, fiscal planning, expenditure policy and budgeting, payroll controls, and preparation and auditing of annual financial statements, at all levels of government. 4.2.11 To accelerate the PFM reforms, the Government, in consultation with the Bank and other development partners, developed towards the end of 2008, a PFM Reform Action Plan that will be implemented over five years (see Letter of Development Policy in Appendix I). As shown in the Technical Annexes, the PFM Reform Action Plan, 2008-2010, covers reform measures over key areas of budget planning and execution; controls and internal audit; accounting and financial reporting; external auditing and oversight; and procurement. The PFM Reform Action Plan has both intermediate and medium-term outputs and outcomes, and forms the basis for coordinated donor actions, including funding for capacity building. The Publication of the PFM Reform Action Plan is a prior action, by March 2009, under PRSSP-III (paragraph 4.2.20). The Government has made good progress in this area. Implementation arrangements for the PFM Reform Action Plan are already underway. This includes the establishment of the PFM Reform Steering Committee to oversee the implementation of the reform program, and a PFM Reform Secretariat that will be responsible for administrative duties. A technical team comprising of representatives of MINECOFIN, line ministries and autonomous agencies will be constituted to execute the implementation plan under the supervision of a PFM Technical Committee. Initial funding for the reforms will be sourced from an existing Multi-Donor Trust Fund with contributions from the EU, DFID and the World Bank. Looking ahead, the Bank will explore opportunities for its participation in a coordinated basket fund financing mechanism that the Government is planning to establish. 4.2.12 Planning and Budgeting: While the MTEF is used for expenditure planning by MINECOFIN, the momentum for its implementation Government-wide has slowed down, because its concepts have not been fully integrated into the budget process, particularly at line ministries. The introduction of the MTEF in 2001 was buttressed by analytical work, sensitization of all stakeholders and training for staff at central and local government levels. The MTEF was seen as an important instrument for implementing the first PRSP. However, the impetus of mainstreaming MTEF across government agencies has been slow. The revitalization

Table 4 Selected PFM Performance Scores for Rwanda Indicator

Baseline 2007

Target 2009/10

Index for multiyear perspective in fiscal planning, expenditure policy and budgeting

C+

B-

Index of effectiveness of payroll controls D+ C+ Index on quality and timeliness of annual financial statements

C+

B-

Source: PEFA Secretariat – Report on Rwanda, November 2007

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of the MTEF is one of the key components of the recently developed PFM Reform Action Plan. Therefore, MINECOFIN has recently produced an operational manual for the MTEF and published it in its website. 4.2.13 Within the MTEF process, the Government has identified the strengthening of performance-based budgeting as a major priority area for reforms. This will involve introducing a performance-based budgetary process that seeks to ensure that the MTEF structure facilitates monitoring of the EDPRS outcomes. Initial steps that the Government has taken towards this goal include the revision of the economic classification of the budget in line with the EDPRS framework. Further to facilitate monitoring of EDPRS outcomes, the criteria for expenditures to qualify as priority spending in the annual budget have been revised. In tandem with these reforms, a gender responsive budgeting process is planned for implementation during 2009. These reforms will be reinforced through training sessions on the MTEF structure and budget preparation process that will target planning units at both central and local government levels. 4.2.14 Budget Monitoring and Reporting: The PFM Reform Action Plan aims to strengthen systems and improve oversight over budget implementation. In September 2006, the Organic Budget Law (OBL) was promulgated. Further, the Government has launched the development of SmartGov, an integrated financial management system (IFMIS) with two key modules: BudgetMaster and PublicBooks (see Letter of Development Policy in Appendix I). BudgetMaster is used to prepare and execute the budget, and has modules covering commitment control, cash management, and central treasury payments. PublicBooks, currently under development, is the general ledger module that collects information from BudgetMaster for the purposes of public accounting. Pilot testing of PublicBooks and its roll-out to budget agencies is expected to begin in the first half of 2009. Completing the piloting of the PublicBooks, an accounting software under the Integrated Financial Management System (IFMS), is a condition precedent to disbursement of the second tranche, under PRSSP-III (paragraph 6.2.4). Simultaneously, an integrated personnel payment information system (IPPIS) that is expected to enhance the security and accuracy of payroll processing, controls and the payment of salaries, is being developed under the auspices of MIFOTRA. The IPPIS will interface with SmartGov for data sharing and processing. 4.2.15 Production of monthly, quarterly, and annual financial statements for all levels of Government is currently, a major challenge. A number of instruments have been put in place for budget management in accordance with the OBL, namely: (i) Financial Regulations that became operational in February 2007; and (ii) the Manual of Financial Management and Accounting, which was published in May 2007. A law establishing the Institute of Certified Public Accountants of Rwanda (ICPAR) was adopted by Parliament in December 2007. Other actions taken include the design and dissemination of new reporting formats for both central and local governments, and the launch of a series of sensitization and training workshops to improve financial reporting at all levels of government. These efforts enabled the Government to produce the first ever-consolidated financial statements in May 2007, with the support of a consulting firm. Because of capacity constraints, a key concern is how the Government will maintain this momentum of preparing auditable consolidated public accounts going forward. Further, audits of individual ministries and agencies have identified, as a major concern, the existence of diverse and inadequate accounting practices across Government. The Bank’s PRSSP-II PCR identified inadequate coverage of external audits of government agencies as a major concern, and indeed a measure supporting such audit was missed. Nevertheless, the Government has taken decisive action and has committed itself to expand the coverage of audits of national and sub-national government agencies (see Appendix I, Letter of Development Policy). In recognition of progress made, a measure that is included as a prior action under PRSSP-III is that 55 percent of Government expenditures (both for central government and districts), for fiscal year 2007, will

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have been audited by the Office of the Auditor General (OAG), by March 2009 (paragraph 4.2.20). 4.2.16 An initiative to produce monthly, quarterly, and annual financial reports for all government entities, including local governments, is work in progress. A capacity building program for public accountants and internal auditors that has both a short term (skills enhancement) and a long-term (for developing professionals) component is ongoing. A key concern for the Government and importantly the OAG is the retention, in the public sector, of skilled and competent financial management staff. In this regard, the Government is developing a staff retention strategy for OAG that will incorporate monetary incentives, and that is expected to be implemented in the course of the 2009/2010 fiscal year. These actions are included in the Government’s PFM Reform Action Plan. 4.2.17 While the Government has made substantial progress towards strengthening the legal and regulatory framework and institutions relating to public sector procurement, implementation of reform outcomes remain, unfinished business. An important reform is that bidders for public procurement contracts now have recourse to appeal contract awards. In this regard, independent review panels have been operationalized at the national and district levels, in accordance with the law. There is now a requirement that the outcome of the independent review of appeals, which was previously an internal Government document, should be published on the RPPA’s website. Requirement to publish the outcome of appeals by contractors of public procurement decisions will greatly enhance the transparency and accountability of public tendering process, and is an important policy measure as outlined in the Letter of Development Policy (Appendix I). The publication by March 2009 of the 2008 annual report of the independent panel is a prior action, under PRSSP-III (paragraph 4.2.20). 4.2.18 The Procurement Code stipulates that all procuring entities must prepare and publish procurement plans indicating the requirements, the process, and schedule of the procurement. This requirement necessitates all procuring entities to have the capacity to prepare these plans on time. Capacity building activities are underway, including the recruitment of procurement officers in all procuring entities, and training courses have been developed and are being provided by the Rwanda Institute of Administration and Management (RIAM). A strategic plan for capacity building in procurement has been adopted, and RPPA has signed a MOU with the School of Finance and Banking (SFB) in Kigali for future collaboration in training. A code of ethics for staff handling procurement matters is being finalized. A major shortcoming of the current public procurement regulations is that the tendering procedures do not contain a provision for justification for restricted or no competition procedures. This weakness including one relating to lack of procurement audits will be eliminated in the reforms that the GoR plans to introduce during the fiscal year 2009/2010, as part of the implementation of the PFM Reform Action Plan. 4.2.19 Public investments management: Finally, in view of the EDPRS emphasis on public investments to, among other objectives, improve infrastructural services and reduce the cost of doing business, the management of public investments has emerged as a high priority action in the Government’s reform agenda. As a result, a new public investment policy that will guide the preparation, selection, and implementation of public investment projects has been developed (see Letter of Development Policy in Appendix II), and was adopted by the Cabinet, early 2009. Approval by Cabinet of the Public Investment Policy is a condition precedent to disbursement of the second tranche under PRSSP-III (paragraph 6.2.4). Based on this policy, the preparation of a medium-term public investment program (PIP) will be revitalized. As such, the selection of projects will be based on a rigorous project evaluation process with clearly laid-out project appraisal criteria. These reform efforts are expected to be fully operationalized within the 2010/2011 fiscal year.

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4.2.20 Prior Actions: During country level consultations, the Government demonstrated that substantial progress had been made in implementing key policy actions that are aimed at reforming the environment for private sector growth, and improving financial governance. The prior actions that are shown in Table 5 have been carefully selected, and they build the momentum for reforms in key areas supported by PRSSP-III. What is remaining now is for the GoR to provide evidence of their fulfillment, prior to Board approval of PRSSP-III. These measures have been extracted from the CPAF that was developed by the Government, with wide consultations with key stakeholders, including the Bank and other development partners. Finally, the prior action relating to audit of Government agencies (both central government and districts) by the OAG is a key milestone in the acceleration of the unfinished reforms that the Bank supported under PRSSP-II. 4.3 Financing Needs And Arrangements 4.3.1 As shown in Table 6 the Government reform programme is fully funded during the timeframe of the implementation of PRSSP-III, covering the mini-budget in 2009, up to fiscal year 2010/2011. Rwanda’s four largest budget support donors – DFID, IDA, EC, and the Bank – are expected to disburse their committed funds as planned. IDA’s Fifth Poverty Reduction Support Grant Agreement was signed in March 2009. Decision to disburse by DFID, and EC will be underpinned by successful outcomes of JBSR assessments in April and September. The resources available under PRSSP-III, amounting to UA 30.3 (US$ 44.46)14 million will be disbursed in two tranches. The programme will be frontloaded. The first tranche of UA 22.3 (US$ 32.72) million will be released during the 2009 mini-budget to support the Government to mitigate any adverse effects that may arise from the ongoing global recession. The second tranche, amounting to UA 8 (US$ 11.74) million will be disbursed during the fiscal year 2009/2010. Suspension of disbursements by other donors will not adversely affects the overall programme, as the amounts involved are a small proportion of the overall budget support grants. Additionally, the Government has identified private capital inflows.

13 Committed disbursements by donor for each fiscal year indicated according to the Government’s Budget Framework Paper, 2009 – 2011/12. Actual disbursements by donor will vary. 14 Based on the March 2009 UA/US$ rate of 1.46736

Table: 5 PRSSP III Required Prior Actions (By End March 2009) A: Create an enabling environment for private sector development • Prior Action #1: Adoption by Cabinet of the following commercial laws

prepared as part of the business law reform process: Bills on Companies Act, Solvency, Negotiable Instruments, Business Registration, and Competition and Consumer Protection (paragraph 4.2.4)

B: Improve governance in public finances • Prior Action #2: Publication of the Public Financial Management

Reform Action Plan, 2008-2010 (paragraph 4.2.11) • Prior Action #3: 55 percent of Government expenditure (both central

Government entities and districts) audited by OAG for the fiscal year 2007 (paragraph 4.2.15)

• Prior Action #4: Publication of the 2008 annual report of the independent panel addressing appeals by contractors of public procurement decisions (paragraph 4.2.17)

Table 6: Financing Government Expenditures (US$ Million) S1 2009 2009/10 2010/11

Gov. Revenues 333 741 850 Gov. Expenditures 754 1,485 1,595 Deficit before Grants (421) (744) (744) Domestic Financing 12 46 18 Financing Gap 409 698 726 Financed by13: Budgetary Grants:

AfDB 33 12 - EC 17 40 46 IDA 70 70 15 Bilateral Donors 148 273 170

Project Grants/Loans 141 303 495 Source: MNECOFIN, and Bank Staff Estimates

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4.4 Beneficiaries Of The Programme 4.4.1 The beneficiaries are the Rwandan population, and therefore, the programmes’ impact is countrywide. The EDPRS, that is supported by this programme, was elaborated through a countrywide consultative process involving all major segments of the society. 4.5 Impact On Gender 4.5.1 Rwanda has made substantial progress in areas of political representation, legal and other institutional reforms to level the playing field for women, and their access to education and other social services. With the recent legislative elections of September 2008, women now comprise 53 percent of the members of the national legislature. A measure supported by this programme is the enhancement of the medium term framework for budgeting and allocation of resources to allow budgets to reflect better, the gender responsive policies of the GoR (see Appendix II). The integration of such a technique into the budget process will ensure that recent gains on closing gender disparities are maintained and enhanced. In this regard, the Government, in collaboration with the United Nations Development Fund for Women (UNIFEM) and other donors, has initiated the gender responsive budgeting training initiative for planners and budgeting officers at both central and local government levels to enhance budget agencies’ clarity of roles and responsibilities for gender equality. 4.6 Environmental Impact 4.6.1 PRSSP-III is classified in Category III according to the procedures for the environmental and social impact assessment. Given that PRSSP-III is a budget support operation, the policy changes it supports are not likely to have any significant direct effects on the environment and natural resources.

V. IMPLEMENTATION, MONITORING AND EVALUATION 5.1 Implementation Arrangements 5.1.1 Responsible institution: The Executing Agency for PRSSP-III is the Ministry of Finance and Economic Planning (MINECOFIN). 5.1.2 Disbursement: The ADF Grant amounting to UA 30.3 million for a two year period starting January 2009 and ending December 2010 will be disbursed in two tranches: the first tranche of UA 22.3 million will cover the 2009 mini-budget15 requirements and will be disbursed upon the entry into force of the Grant Agreement and fulfillment of the conditions precedent to the first disbursement. The disbursement of the second tranche of UA 8 million is expected to be disbursed in May 2010 and will be considered after the satisfactory mid-term review of programme execution, and subject to GoR satisfying the conditions stipulated in section VI of this report. The amount of the two tranches and their disbursement schedule were determined (i) on the basis of the annual resources needs as provided for in the macroeconomic framework for the mini-budget 2009 and fiscal budget for 2009/2010; and (ii) taking into consideration the projection of the resource flows to support the Government’s budget during this timeframe. The ADF will pay the two grant tranches into a special account to be opened by the Treasury with the BNR. 15 Rwanda became a member of the East African Community (EAC) on 1 July, 2007 after acceding to the EAC

Treaty on 18 June 18, 2007. Accordingly Rwanda's current budget calendar will change beginning 2009. The 2009 mini-budget that will run from 1 January to 30 June 30, 2009 will enable the country to transition to the EAC budget calendar that runs from 1 July to 30 June.

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5.1.3 Procurement: Under the PRSSP-III, like in prior Bank Group budget support operations in Rwanda, procurement will be conducted according to the current national system. The national system for the procurement of goods and services is deemed acceptable by all donors in the Budget Support Group. A procurement law, which was published in 2007, is deemed to be broadly in line with international standards. 5.1.4 Audit: A Public Expenditure and Financial Accountability (PEFA) assessment that was completed in October 2007, and a Fiduciary Risk Assessment (FRA) that was conducted by DFID and the Bank in 2008, found Rwanda’s PFM systems to be sound, and the overall level of fiduciary risk to be moderate. The GoR and the seven development partners that provide budget support including the Bank signed a MOU in September 2008 to guide joint actions for the effective delivery and monitoring of use of budget support grants. The ADF will rely on the complete report on the implementation of the State Budget of each previous year covered by PRSSP-III that the Auditor General submits to the Chamber of Parliament annually. The Office of the Auditor General (the supreme audit institution of Rwanda) will transmit such reports to the Bank upon their approval by Parliament. 5.2 Monitoring And Evaluation Arrangements 5.2.1 Responsible institutions: MINECOFIN will assume lead responsibility for implementation of the PRSSP-III. To this end, it will ensure that the ministries and structures involved fully play their respective roles in the execution of the reforms and measures under their jurisdiction. In particular, the External Financing Unit, under the supervision of the Permanent Secretary and Secretary to the Treasury of MINECOFIN, will ensure the successful implementation of the programme and its monitoring and evaluation. This unit, which also acts as the secretariat of the BSHG, has in the past demonstrated its technical capacity to coordinate the implementation of the PRSSP’s of the ADF, PRGF of the IMF, PRSC’s of the World Bank, as well as interventions of the European Union and of the bilateral donors. Specifically, the External Financing Unit, MINECOFIN, will be responsible for the following activities under PRSSP-III: (i) reports of the BSHG’s bi-annual review meetings (April and September) covering the status of budget implementation in priority sectors of the EDPRS as defined in the CPAF; and (ii) monitoring resource mobilization and program implementation on behalf of the ADF and other development partners. 5.2.2 Monitoring: The Bank will rely on existing institutional arrangements for monitoring of the EDPRS, and the CPAF, as has been agreed by the donors supporting the budget and the GoR, as framework for monitoring and evaluation. The institutional framework for monitoring the EDPRS is built on the work of the National Institute of Statistics of Rwanda (NISR), and the monitoring activities of the EDPRS’ sector working groups that are coordinated by an EDPRS monitoring Secretariat in MINECOFIN. As shown in Appendix II, the CPAF prioritizes a few key indicators and policy actions of the EDPRS for monitoring during the bi-annual Government-donor Joint Budget Support Reviews (JBSRs). Individual budget support partners have the flexibility of selecting from the CPAF those indicators that will serve as triggers for disbursement of their funds. Once finalized, a scoring mechanism that has been discussed by the Government and the donors will provide an overall performance rating on the CPAF indicators. The Bank through its field office in Rwanda will continue to engage the Government and other donors in refining the policy measures in the CPAF as the policy context evolves. Such revisions are provided for in the Partnership Agreement. 5.2.3 The monitoring process of the indicators under the CPAF and EDPRS is similar, and contains a number of required participatory reviews and reports. An EDPRS progress report is prepared each year, building on the results of the monitoring process. At sector level, sector

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review reports are also prepared and review meetings are organized where all stakeholders, including development partners, participate. JBSRs by the Government and the budget support donors are held twice a year to review the data and evaluate progress on the EDPRS. One meeting is primarily backward looking as it reviews the performance during the past year, including outturns on the budget of the last fiscal year. The forward-looking review meeting focuses on the plans for the budget of the following year and the medium term expenditure framework. The JBSR also discusses the results of the monitoring exercises, the joint sector reviews, and the EDPRS progress report, and assesses progress on the CPAF indicators. The Bank’s supervision of the PRSSP-III will primarily be through the participation in the two JBSRs, and the participation of the Rwanda Country Office in the regular monitoring activities of the BSHG at country level including, engaging implementing agencies and other development partners as necessary. 5.2.4 Evaluation: To promote mutual accountability, a Partnership Agreement that outlines the procedures and modalities for a multi-donor approach to budgetary support was signed by the Government and the key budget support donors in October 2008. Accordingly, all key budget support donors are expected, during 2009, to fully align their monitoring and evaluation framework to the CPAF measures. The quantitative indicators that are included in PRSSP-III’s Results Based Logical Framework are derived from the CPAF (see Appendix II), and have been agreed with the GoR as priority measures for monitoring progress under this programme. At the end of the programme’s implementation, the Bank and the Government will prepare a joint Program Completion Report (PCR) that will evaluate PRSSP-III’s implementation, the outcomes achieved vis-à-vis the envisaged, and derive lessons that will inform future interventions.

VI. LEGAL DOCUMENTATION AND AUTHORITY 6.1 Legal Documentation 6.1.1 The financing instrument that will be used for this operation is an ADF Grant of UA 30.3 million in the form of budget support to the Republic of Rwanda from the ADF-XI allocation. The Grant will be disbursed in two tranches, upon fulfillment of the conditions outlined below. 6.2 Conditions Associated With Bank’s Intervention 6.2.1 Prior Actions: Before this Grant proposal is presented to the ADF Board for approval, the Government of Rwanda shall provide evidence to the Bank that measures outlined in paragraph 4.2.21 (see Table: 5), as Prior Actions, have been implemented. 6.2.2 Entry into force of the Grant Agreement shall be subject to fulfillment of the provisions of section 5.01 of the General Conditions. 6.2.3 Conditions precedent to disbursement of the first tranche of UA 22.3 Million: The disbursement of the first tranche of the ADF Grant will be subject to maintenance by the beneficiary of an appropriate macroeconomic framework, and fulfillment of the following specific conditions:

• Transmit to the Fund the bank references for a Treasury account with Banque Nationale du Rwanda (BNR), that is intended to receive the Grant resources.

6.2.4 Conditions precedent to disbursement of the second tranche of UA 8 Million: The obligation for the Fund to disburse the second tranche of the grant will be subject to maintenance of an appropriate macroeconomic framework, and positive outcome of the mid-term review. Furthermore, the beneficiary shall fulfill the following specific conditions:

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• Transmit to the Fund, evidence of launching of the Revenue Authorities Digital Data Exchange (RADDEX) system at borders with Tanzania and Uganda (paragraph 4.2.5).

• Transmit to the Fund, evidence of the establishment of a private credit reference bureau (paragraph 4.2.7).

• Transmit to the Fund, evidence of complete piloting of the PublicBooks, an accounting software, under the Integrated Financial Management System (paragraph 4.2.14).

• Transmit to the Fund evidence of the approval by the Cabinet of the Public Investment Policy (paragraph 4.2.19).

6.3 Compliance With Bank Policies 6.3.1 This programme complies with all applicable Bank Group policies and guidelines, including: (i) Bank Group provisions on non-concessional debt accumulation policy; (ii) the 2004 Guidelines for DBSL operations; (iii) the Bank’s Governance Strategic Directions and Action Plan, 2008–12; and (iv) the Environmental and Social Assessment Procedures (ESAP), and requirements on crosscutting issues.

VII. RISKS MANAGEMENT 7.1 The following risks and mitigation measures have been identified: 7.2 Risk #1: Political risk: The continued presence of the Forces Democratic de Liberation du Rwanda (FDLR) in eastern DRC remains a security risk for Rwanda as well as a source of tension in the region. Recently, two development partners suspended their budget support disbursements in reaction to alleged actions by Rwanda in eastern DRC. Further, the presence of the FDLR in the DRC has continued to undermine the restoration and normalization of commercial relations that would provide mutual socio-economic benefits to the people in Rwanda and DRC.

• Mitigation: The recent launching of joint operations by the Rwandan and Congolese forces to root out the FDLR is a step in the right direction. Further, a MoU between the Government and budget support donors include an underlying principle that binds parties to promote peace in Rwanda and the region. Internally, Rwanda remains secure and politically stable.

7.3 Risk #2: Macroeconomic risk: Inflation accelerated in the later half of 2008 mainly due to domestic demand pressures and rising imported food and fuel prices. Further, exogenous shocks to exports or imprudent borrowing on non-concessional terms could lead to a rapid deterioration of Rwanda’s debt dynamics over the medium-term.

• Mitigation: The Government, in consultation with the IMF, has taken actions to stem the recent surge in inflation and BNR will continue to take necessary measures to curb inflationary pressure. Regarding debt sustainability concerns, the GoR is putting emphasis on export promotion. Further, it adopted in 2008, a comprehensive debt management strategy that will guide future public borrowing needs.

7.4 Risk #3: Risk related to the impact of the global recession: Rwanda is vulnerable to the ongoing global recession. If the recession continues beyond 2010, Rwanda could be unfavourably impacted through reduction in inflows of ODA, foreign direct investments, remittances, trade finance, and export revenues. This could slow down growth and progress towards meeting the MDGs.

• Mitigation: A committee is in place that is advising the Government on measures to be taken to manage the impact of the global recession. Further, as a good performer, especially on the governance front, Rwanda’s ODA would tend to be protected, at least in the medium-term, the timeframe required to implement reforms under PRSSP-III.

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VIII. RECOMMENDATION

8.1 Management recommends that the Board of Directors approve the proposed Grant of UA 30.3 million from the resources of ADF-XI to the Government of Rwanda in the form of general budget support for the purposes and subject to the conditions stipulated in this report.

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Appendix I RWANDA

Poverty Reduction Strategy Support Programme (PRSSP-III) Appraisal Report

Letter of Development Policy

Dr. Donald Kaberuka, President of the African Development Bank Group ADB Temporary Relocation Agency (Tunis) Angle: Av. du Ghana, Rue Pierre de Coubertin et Rue Hedi Nouira BP. 323 1002, Tunis Belvedère TUNISIA Dear President Kaberuka, RE: LETTER OF DEVELOPMENT POLICY FOR THE:

POVERTY REDUCTION STRATEGY SUPPORT PROGRAM (PRSSP) III

1. We thank the African Development Bank (AfDB) for supporting the implementation of our reforms under both, our first Poverty Reduction Strategy Paper (2002-2005), and the second medium-strategy towards attainment of the long-term Rwanda Vision 2020 objectives, the Economic Development and Poverty Reduction Strategy (EDPRS), for the period, 2008 to 2012. AfDB’s support, through the Poverty Reduction Strategy Support Programme (PRSSP) I and PRSSP II. These AfDB’s supported programmes, have enabled the Government of Rwanda (GoR) to pursue wide ranging reforms aimed at improving good governance and the business environment for a vibrant private sector.

2. As we outlined in the Letter of Development Policy for the Poverty Reduction Strategy Support Programme (PRSSP) II, the GoR continues to be strongly committed to the implementation of an ambitious reform agenda to increase participatory growth and reduce poverty. The reform program under the EDPRS prioritizes Rwanda’s growth and human development, and emphases decentralization, and a greater role for the private sector. These priorities are highlighted in three EDPRS’s flagship programs: Sustainable Growth for Jobs and Exports; “Vision 2020 Umurenge”; and Governance.

3. The first flagship, sustainable growth for jobs and exports, focuses on the development of skills and capacity for productive employment, the improvement of infrastructure, especially energy, transport and communication, the promotion of science, technology and innovation as well as the widening and strengthening of the financial sector. The second flagship, the Vision 2020 Umurenge Programme (VUP), is designed to accelerate the reduction of extreme poverty by means of a highly decentralized integrated rural development programme. The objective of the third flagship is to improve governance in several areas, covering among others a wide range of public sector reforms and the improvement of political, administrative and financial accountability. In addition, it is aimed at building public sector capacity and promoting employment. We continue our commitment to reforms in these key areas.

4. Substantial progress has been made in the first year of implementation of the EDPRS, as outlined below. Nevertheless, Rwanda still faces many challenges. We are therefore writing to request approval of the third PRSSP to support the second year of implementation of the EDPRS.

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Recent developments and main achievements

5. The economic environment in Rwanda is characterized by continued stability in spite of adverse effects of exogenous shocks. Real GDP growth accelerated to 7.3 percent and 7.9 percent in 2006 and 2007, respectively. Average annual inflation, however, has increased substantially in 2008 due to the increase in food and fuel prices, which has also led to a widening of the current account balance despite an impressive increase in exports in coffee, tea, minerals and tourism. The fiscal program remains on track with revenues again outperforming their targets and prudent expenditure policies.

6. The global economic slowdown has so far had only a limited effect on Rwanda’s economy, which is likely to change in 2009. Under the auspices of the Ministry of Finance and Economic Planning, a Global Financial Crisis Steering Committee has been established to manage the impact on Rwanda of the global financial crisis. Growth projections have been revised downwards to 6% in 2009 to reflect the dampening effects of the slowdown on investment outlays and faltering export performance. The negative impact has been taken into account by the GoR, reflected in limited spending and additional programs in the agriculture sector, for example, the restructuring of the crop intensification program and a voucher system for fertilizer for smallholders. The risks remain, however, on the downside and additional financing needs might arise during the course of the year to cope with the downturn of the global economy.

7. Nevertheless, EDPRS implementation is on track and the medium term economic outlook is favorable. However, in order to achieve its medium-term objectives, Rwanda is addressing the most important obstacles to economic growth (severe infrastructure gap and skilled-labor shortage) through increasing investment in physical and human capital. Yet it is critical that the required scaling up of public investment is well justified, prepared and implemented to deliver the desired results, especially given the limited resources. The GoR is therefore focusing on improving the prioritization and efficiency of expenditures. Efforts are being made to strengthen the institutional framework for the Public Investment Program (PIP). To date, a public investment policy has been drafted and guidelines for identifying investment selection criteria and project prioritization that maximize the returns on investment, and safeguard public debt sustainability are being developed. The Government will also soon be embarking on a process to institutionalize Public Expenditure Reviews with the aim of strengthening public expenditure management and monitoring of spending. The intent is to improve accountability of line ministries and to strengthen the prioritization process within sectors.

8. Substantial achievements have been accomplished in the area of aid harmonization, leading to improved coordination between the GoR and the donor community and better alignment of policies. The main achievements in that regard are the recently completed Common Performance Assessment Framework (CPAF) and the Donor Performance Assessment Framework (DPAF)—key components of the newly established EDPRS integrated monitoring framework—aimed at enhancing results based management and strengthening mutual accountability. In addition, sector wide approaches have been developed for a number of sectors, including agriculture, energy and health and are currently in preparation for others, such as transport.

9. The CPAF, which consists of a set of indicators and policy actions selected from the EDPRS Results and Policy Matrix, forms the basis for partners’ joint assessment of the GoR’s performance in the implementation of the EDPRS. The CPAF is complemented by the DPAF, which consists of a set of indicators and actions drawn from international and national agreements relating to aid and its effective delivery, and forms the basis for Government’s assessment of donor performance. Reviews in the context of both the CPAF and DPAF are synchronized around an annual cycle. Reporting of performance against individual CPAF indicators is led primarily at the sector level in advance of the Joint Budget Support Review (JBSR). Sector performance reports are prepared in time for further discussion at the JBSR.

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10. The CPAF also draws from the recently concluded Joint Governance Assessment (JGA), which aimed to establish a common understanding of governance problems, and priorities, as well as a framework for assessing progress towards implementation of the governance agenda on the basis of agreed indicators and benchmarks. Overall, the JGA found that Rwanda has achieved impressive progress since 1994 in areas of governance assessed. The JGA monitoring indicator framework has been harmonized and integrated within the existing EDPRS results monitoring framework and the coordination of implementation and monitoring of the JGA findings will be taken forward by the EDPRS Governance Implementation Working Group.

Progress and challenges of EDPRS implementation

Flagship 1: Sustainable Growth for Jobs and Exports

11. Education: Jointly with other development partners, the African Development Fund (ADF)’s UA 15 million Education Sector budget support grant is supporting the implementation of Rwanda’s 5-year Education Sector Strategic Plan (ESSP) that is focused on providing equitable access to quality education. Good progress has been made on the implementation of ESSP: Rwanda is well on its way to achieve universal primary education with gender parity and MINEDUC has started down the path of preparing a comprehensive post-basic education strategy with the formulation of a technical and vocational education and training (TVET) policy and a higher education policy.

12. However, critical ESSP implementation challenges pertaining to the quality of education still exist. The current pupil-teacher ratio of 71:1 is way above the MDG target of 45:1, there is still slow progress in universal completion of quality primary education, with the primary completion rate (PCR) of 51.7%, a repetition rate of about 15.8%, and a drop-out rate of 14.6%. The Government’s response to the quality challenge has focused on increasing the supply of qualified teachers. From 2007 capitation grants have allowed schools to hire contract teachers. In addition, the GoR has recently approved a Teacher Management and Development Policy and is now developing a strategic plan that will address quality challenges.

13. Health: The GoR has maintained its reform program to the delivery of health services. The law governing mutuelles has been adopted and health services have been scaled-up with the expansion of Performance-Based Financing (PBF) and of Community Health Insurance through the Mutual Insurance system.

14. Preliminary results from the interim Demographic and Health Survey done in April 2008 show that there has been a marked improvement in sector performance indicators linked to service delivery. For example, the under-five mortality rate has decreased by more than 32% in recent years (from 152/1000 in 2005 to 103/1000 in 2008) while the percentage of births attended by skilled health workers has increased by about 33% (from 39% in 2005 to 52% in 2008) and the percentage of pregnant women receiving Intermittent Presumptive Treatment for malaria has increased by more than 128% (from 28 in 2005 to 64 in 2008). The same improvement has been documented for family planning indicators, with the contraceptive prevalence rate shooting up from 10% in 2005 to 27% in 2008.

15. Funding remains a challenge in the health sector. Resources available for the health sector are below the amounts required to effectively address sector priorities. Moreover, the high degree of aid dependency, where 53% of total health expenditures come from donors, is also problematic. Rwanda’s health sector has 21 official donors, disbursing 74 percent of their total support via more than 40 NGOs, and a larger number of local community service and community-based organizations, making it difficult for the GoR to ensure resources translate into results. To address this, the Government will continue its efforts to further develop the sector-wide approach (SWAp) and medium-term expenditure framework (MTEF)

25

16. Electricity and Urban Water Supply: Rwanda has prioritized the development of alternative lower cost indigenous energy sources of power generation to meet growing demand. The successful piloting of the methane gas power project on Lake Kivu proves the viability of methane gas for electricity generation and offers the potential to replace the existing costly thermal generation. Looking forward, a number of lower cost generation projects are under various stages of development. With the arrival of the International Development’s Association (IDA)’s financed Jabana HFO Power Station (20MW, early 2009), the Rukarara Hydro Power station (9.5 MW, early 2010) and the Nyabarongo Hydro Power station (27.5 MW, 2012) national generation capacity will increase more than 50%, paving the way for a gradual reduction of electricity tariffs to reach a cost-reflective tariff level by 2011. In addition, the Government has recently embarked upon a sizable micro-hydro development program to provide power to rural villages and towns and an energy efficiency program is underway.

17. Recent Government reform initiatives are enabling modernization of the sector and its ability to step up and perform its due role in enabling Rwanda’s development goals. Notably, several laws which together define the emerging sector structure and institutional framework - including GoR’s policy to increase private sector investments primarily in generation and off-grid electricity distribution - have been approved. These include, besides the Electricity Law: the law to unbundle the national monopoly and vertically integrated utility ELECTROGAZ, into separate electricity and water parastatals: RWASCO (Rwanda Water and Sanitation Corporation) and RECO (Rwanda Electricity Corporation); laws to set up the Rwanda Utilities Regulatory Agency (RURA) and National Energy Development Agency (NEDA). Furthermore, the Government plans to update the energy sector policy note, to include a framework for decentralization and develop a comprehensive energy strategy that further emphasizes the development of alternate energy sources and private sector participation in the sector. Continuing efforts will be made to improve the operational efficiency of Electrogaz, the public utility responsible for electricity and urban water supply and distribution.

18. Transport: The transport sector improvement program in the EDPRS aims to: (i) improve transport links internally and internationally; (ii) reduce and keep transport costs under control; (iii) improve the institutional framework and strengthen the capacity of partners involved in the sector; (iv) improve road safety; (v) achieve sustainable financing of road maintenance; and (vi) sustain the preservation of roads rehabilitated or constructed.

19. In line with the program, the GoR has developed a transport strategy that sets clear priorities for road maintenance; explores options for increasing cost recovery and additional sustainable funding (subsidy) mechanisms, examines the role of a road management agency with sufficient independence from central government operations and the Road Fund, and provides clear guidelines and criteria for the choice of investments in the sector. As part of its commitment to the program, the Government is also giving priority to improving regional transportation links. Both Rwanda and Burundi have undertaken to develop a 500 km road linking the country with neighbouring Tanzania to reduce their overdependence on Kenya's Mombasa port. Progress in this front is good, thanks to the ADF’s Kicukiro - Kirundo Road Project’s grant of UA 15.3 million that will link Rwanda and Burundi. Further, the ADF is financing a feasibility study for the Isaka – Kigali Railway. Rwanda is also expected to benefit from regional efforts to rehabilitate key corridors, such as the World Bank’s East Africa Trade and Transport Facilitation project.

20. Water Resources, Supply and Sanitation: Rwanda is on track to reach the water and sanitation MDGs, thanks to donor support, including the ADF’s UA 11.77 million grant for the Drinking Water and Electricity Supply Project whose implementation started in 2006. However, progress in increasing access to water supply has not been met with similar improvements in access to proper sanitation facilities. While fairly robust policies and nation-wide programs are in place for water supply, this is not the case for sanitation. Translating commitments to improve sanitation into operational strategies and large scale programs would need further elaboration of the current policies concerning sanitation. The Government is therefore updating its Water and Sanitation Policy to

26

address sanitation issues, along with a number of emerging issues not dealt properly under the current policy framework including: Sector financing mechanisms and facilitated access to funding for decentralized actors (districts, communities, operators); Institutional and funding arrangements for advise and technical support to decentralized actors; Tariff systems taking into the differences in water abstraction and production costs; the strengthening of sector-wide M&E systems; and the regulatory oversight of local water supply systems in the context of decentralization.

21. Significant institutional changes have recently taken place to increase efficiency in operations geared towards advancing water and sanitation development initiatives. In addition to the unbundling of ELECTROGAZ into separate utilities, the responsibility for water and sanitation facilities and services is now under the Ministry of Infrastructure (MININFRA) while water resource management is under MINIRENA (Environment and Natural Resources). While MININFRA will be responsible for sector policies, strategies and M&E, a separate agency, Rwanda Water and Sanitation Agency (RWASA) will be established under the Ministry for program coordination, planning, funding and implementation. In addition, the Ministry of Health (MINISANTE) has taken the lead role for the promotion of hygiene at community level. These changes have made it necessary to clarify institutional roles and set up coordination mechanisms at two levels: first, among central agencies directly involved in water supply and sanitation, namely: MININFRA, the proposed “Water and Sanitation Agency”, RWASCO and RURA (the multi-sector regulator); and, second, with other ministries involved in the water resource management (MINIRENA), local governments (MINALOC), public health (MINISANTE) and Education.

22. Agriculture: The Government of Rwanda recognizes the importance of the agricultural sector in achieving the overall growth and poverty reduction objectives. However, agriculture, which supports 80 percent of the population, is highly susceptible to shocks (particularly weather-related) and has expanded slowly because of low productivity and poor land use practices. In line with this, the Government has recently updated its sector strategy, the Strategic Plan for the Transformation of Agriculture (SPAT II) aligned around four strategic axes: (i) Physical resources and food production: intensification and development of sustainable production systems; (ii) Producer organization and extension: support to the professionalization of producers; (iii) Entrepreneurship and market linkages: promotion of commodity chains and the development of agribusiness; and (iv) Institutional development: strengthening the public sector and regulatory framework for agriculture.

23. Given the limited scope to increase arable land, vulnerability to shocks, and a high rate of population growth, emphasis is being put on increasing agricultural productivity through improving water management, controlling soil erosion, intensifying the use of fertilizer, integrating livestock development into crop farming, and enhancing extension services. The planned LWH project and the crop intensification program, currently being expanded provide the opportunity to address some of the fundamental constraints to agricultural growth in Rwanda.

24. Export Promotion: The adoption of the export promotion strategy has already yielded results, with an average annual growth of 22.8 percent of exports of goods and non-factor services between 2004 and 2008. Total exports of goods and non-factor services amounted to USD 332 million in 2007 compared to USD 200 million in 2004 and are expected to increase further to USD 381 million in 2008. The increase can be mainly attributed to higher commodity prices and export volumes of coffee, tea, and minerals as well as an increase in tourism arrivals.

25. To strengthen and accelerate progress made so far, the Government’s export promotion strategy will continue to focus on enhancing productivity in the traditional sectors and diversifying the export base in the coffee, tea, and tourism sectors.

26. Financial Sector: Further progress was made in reforms to develop and strengthen the financial sector. Key measures in 2008 include: (i) Increased capital requirements for banks and microfinance institutions; (ii) An over-the-counter debt market launched in January; (iii) Union des Banques Populaires du Rwanda – a large network of independent credit cooperatives – was

27

transformed into a commercial bank in February; (iv) Cabinet approved the decree establishing the National Payments Council and the GoR adopted a National Payments Strategy to improve the payments infrastructure and address the development of basic payment services (v) The national electronic payment system switched to new management; (vi) Parliament passed legislation concerning Anti-Money Laundering and Combating the Financing of Terrorism in June and organization and supervision of the insurance industry in July; (vii) Work continued at the National Bank of Rwanda to prepare for insurance supervision and consolidated banking supervision and to develop a comprehensive internal audit manual; (viii) The Accountants Bill requiring all financial institutions, large companies, and public companies to comply with International Auditing Standards (IAS) and International Financial Reporting Standards (IFRS) was passed by Parliament and (ix) A private credit bureau that also operates in Tanzania and Uganda was granted a license in October.

27. However, several challenges remain. Poor access to credit is a major obstacle to private sector development, particularity small and medium enterprises (SME)’s. It is estimated that only 3 percent of the population use the services of commercial banks, going up to about 9 percent if the services of the Banque Populaire (BPR) are included.

28. Going forward, the agenda for financial sector reforms, based on the Financial Sector Development Plan cover a wide range of areas including: improving banking services and access to credit, modernizing the national payments systems, developing long-term finance, capital markets and a secondary mortgage facility, strengthening legislation over contractual savings and investments, and promoting the stability of the financial sector. The recently approved ADF grant of UA 5 million under the Competitiveness and Enterprise Development Project (CEDP) II, will have favourable impacts on its beneficiaries including improving access to credit by availing credit profiles of borrowers, and enhancing credit and risk-based supervision.

29. Private Sector Development: The Government is committed to improving the legal environment affecting private sector development. Drafting and reforms of fourteen major business laws started in early 2006. Improvement of these laws are expected to enhance the overall business environment and, consequently, the doing business (DB) indicators, and provide an important synergy with the capacity building efforts in this area under ADF’s CEDP II. Three laws have already been voted (business registration services agency; law establishing commercial courts; and law on arbitration, conciliation and mediation). Validation or legislative process is ongoing for eleven draft bills (companies act; insolvency; business registration procedures; negotiable instruments; competition and consumer protection; provisions applicable to private financed infrastructure; labour; contract law; secured transaction; condominium; and electronic transactions).

30. A doing business unit has been established within the Rwanda Investment and Export Promotion Agency (RIEPA). RIEPA has been integrated within the recently established Rwanda Development Board and will continue to spearhead the implementation of the doing business action plan and other legal reforms affecting private sector development. Efforts are underway to install the Revenue Authorities Digital Data Exchange (RADDEX) system, an electronic exchange of information system, which will ease doing cross border trade. Finally, the Ministry of Justice is planning to establish a permanent commission for legal reform. The Commission will replace a temporary task force set up within the Ministry to review all the fourteen commercial laws.

Flagship 2: Vision 2020 Umurenge

31. Social Protection: The Vision 2020 Umurenge Program (VUP) flagship aims to eliminate extreme poverty by the year 2020 through social protection programs, development of productive activities, micro-credit, and direct support to households in the form of transfers and community-based services. The program will be implemented in the poorest Sector (Umurenge) in each of the 30 Districts, for a total of 30 Sectors. Implementation of the VUP will be planned and coordinated by the Sector administrations with participation at the local (Umudugudu) level and with the Districts responsible for technical support and supervision.

28

32. Weak administrative capacity at the Sector level poses a significant challenge to program implementation. Efforts continue to improve the weak administrative capacity at national, sector and district levels. With funding from Rwanda’s Decentralization and Community Development Project (DCDP), staffing of the Ministry of Local Government (MINALOC) staffing has been augmented by the arrival of its National Coordinator for VUP, the first of five national appointees and three international appointees (funded by DFID) who will constitute MINALOC’s VUP management. Decentralized staffing at Sector (Umurenge) level has also been augmented with DCDP funding by appointing a program manager and a financial specialist for each of the 30 pilot Sectors. Training of Sector staff in VUP procedures and plans has also begun. MINALOC has completed preparation of a revised set of VUP program manuals and begun pilot implementation of VUP in several Sectors, with the number constrained by funding limitations. It is also working, in conjunction with the Cluster Group for Social Protection, to address the EDPRS commitment to develop a strategy for social protection in relation a variety of vulnerable groups.

33. To ensure that program impact is measured in the long term, a database is being set up and efforts are being made to ensure that emerging VUP data allows monitoring against CPAF indicators. Furthermore, data collection is underway to bolster baseline ubudehe data, with the aim of providing a more reliable baseline for targeting.

Flagship 3: Improve Economic Governance and Develop Implementation Capacity

34. Public financial management: Reform efforts in public financial management are beginning to show results as confirmed by the Public Expenditure and Financial Accountability (PEFA) report published in July 2008. During the course of the year, the operational manual for the Medium Term Expenditure Framework was completed, the PFM reform strategy and the action plan for 2008-2012 was finalized, Execution reports of central government transfers to local governments for January-June 2008 were published. The consolidated government financial statements for 2007 were completed by end-March 2008 and subsequently approved by the Cabinet. A medium-term debt management strategy with clear limits for loans and guarantees that are consistent with the provisions in the Organic Budget Law was developed, and Parliament passed a law transforming the National Tender Board (NTB) into the Rwanda Public Procurement Agency. In line with identified needs, capacity building and training in PFM continued during the course of the year.

35. Further steps will be taken to strengthen the public financial management (PFM) system. The Government will begin implementing its new medium-term strategy for PFM reform. As part of the broader strategy, the PFM action plan for 2009 includes measures in the following areas:

• Economic Management and Budgeting: Build capacity for research and macroeconomic modelling and establish a macro database; enhance the use of MTEF, government-wide; align the budget calendar to practices within the East African Community; clarify reporting relationships and reporting formats for sub-national government units; and establish an independent tax appeal mechanism.

• Financial Management and Reporting: Reorganize and strengthen the Office of the Accountant General and the Office of the Director of Administration and Finance in ministries, departments, and agencies; develop a policy and strategy for government portfolio management and clear guidelines on borrowing; start introduction of SmartGov (the new integrated financial management information system, that include an accounting module, known as PublicBooks); and approve the software for the new integrated personnel and payroll information system.

• Public procurement: Adopt and implement the new organizational structure of the Rwanda Public Procurement Authority; promote accountability and transparency in public procurement through the publication of the reports of the independent review panel; and conduct a capacity needs assessment in central government ministries and agencies and sub-national government units to ensure sufficient staffing.

29

• Budget Execution Oversight: Conduct an organizational review of the Office of the Government Chief Internal Auditor and internal audit units in ministries, departments, and agencies and sub-national government units; prepare external audit regulations; and expand the coverage of audits of national and sub-national government agencies by the Office of the Auditor General.

36. Fiscal Decentralization: Efforts to advance the fiscal decentralization program have focused on improving the intergovernmental transfer system, along with reporting mechanisms and the framework for oversight. A review of the existing grant allocation practice was undertaken and guidelines for the allocation formulae for block grant and sector earmarked grants have been developed.

37. Reporting templates have been revised and compliance to the quarterly reporting requirement by districts has improved, enabling the timely publication of bi-annual transfer execution reports. To facilitate monitoring efforts, all district bank accounts were consolidated and transferred to the BNR. Furthermore, a Fiscal Decentralization Steering committee chaired by MINECOFIN is in place and active. This committee deals with all issues regarding fiscal decentralization with an aim of making it more effective and result-oriented

38. Monitoring and Evaluation (M&E): In order to monitor and evaluate the performance of the EDPRS, the Government of Rwanda has developed an Integrated Results and Performance Framework consisting of three components: a National Results and Policy Matrix, a Common Performance Assessment Framework and a Development Partners’ Assessment Framework.

39. A Results and Policy Matrix linking EDPRS results measurements and policy actions for all key sectors has been developed. An EDPRS Central Monitoring and Evaluation Secretariat responsible for producing the annual EDPRS progress reports has been established in MINECOFIN and M&E officers in all sector ministries have been recruited to support the collection of relevant EDPRS sectoral progress data. Capacity gaps have been identified in both areas of M&E and Statistics and are being addressed through a combination of training and exchange of experiences as part of an M&E Community of Practice that has been created.

40. The National Institute of Statistics (NIS) has been integrated in the EDPRS M&E system. Emphasis has been placed on strengthening the capacity of NIS, seen to be critical for implementation of the EDPRS M&E framework and a National Statistical Development Strategy (NSDS; 2007-11) has been prepared. This strategy will align statistical production with EDPRS and sector monitoring requirements, and will support the enhancement of statistical capacity. To date, the NIS has completed development of metadata, to support the CPAF

41. Civil Service Reform: Rwanda’s civil service reform has registered some progress on discrete tasks, such as the completion of functional reviews for all ministries, completion of a comparative pay study, development of Human Resource Procedures manuals and establishment of a civil service reform sector working group. Work is also underway to extend the functional review process to all public agencies, a national skills audit and a national census of employees are on-going, and an integrated personnel and payroll system is being developed.

42. However progress overall remains patchy and slow, with no discernable evidence that the sum of core reform initiatives led by MIFOTRA is resulting in significant improvement in public service efficiency or effectiveness. Progress appears to have been hampered principally by the lack of a sufficiently comprehensive and overarching strategic framework, insufficient capacity within MIFOTRA (especially on analysis, planning and M&E) and poor co-ordination among stakeholders. Therefore, four key developments/measures deemed essential for the future of civil service reform in Rwanda are being prioritized by MIFOTRA: the development of a new strategic framework, continued strengthening of co-ordination mechanisms at a policy, technical and management level, the continued engagement of higher authorities and strengthening the capacity of MIFOTRA.

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Support Under PRSSP-III

43. Building on the accomplishments under the previous two ADF supported programmes and in line with the goals and objectives highlighted in the EDPRS, PRSSP-III will support our efforts to create an enabling environment for private sector development and improve the effectiveness, transparency and accountability in the use of public financial resources. The expected outcomes of the programme will be: (i) an improved business environment; (ii) deepening access to financial services, especially by small and medium-sized enterprises (SMEs); and (iii) improved public financial management in areas of expenditure policies, budget preparation, execution and monitoring; procurement, and accounting and auditing at central and local government levels.

44. While we recognize that Rwanda still faces many challenges and, the Government remains committed to implement the EDPRS and achieve sustainable economic growth and a substantial reduction in poverty. We thank the African Development Bank for its continued support as we pursue this objective.

Yours Sincerely

Appendix II RWANDA

Poverty Reduction Strategy Support Programme (PRSSP-III) Appraisal Report

31

Operation Policy Matrix

The Common Performance Assessment Framework (CPAF) [An Extract]16

Expected Performance Public Policy Actions EDPRS

Strategic Outcomes

Indicators

Baseline 2006

Targets 2009/2010

Targets 2010/2011

Source of Data

Policy Action

Key Policy Benchmarks/Outputs by Year

Responsibility Centre

EDPRS FLAGSHIP PROGRAM 1: GROWTH FOR JOBS AND EXPORTS EDPRS Strategic Objectives: (i) Increased Economic Growth; and (ii) Enhancing Population Development – Paragraph 4.2.2

1. Enhanced business climate

1.1 Ranking in Doing Business

158 150 145 World Bank Doing Business Report

Implement strategies to improve business and investment climate in Rwanda

FY 2008:- Establish commercial registration agency Legislate Bills on Companies, Contracts, Secured Transactions,

Business Registration and Insolvency Implement RADDEX system to ease cross-border trade with

Tanzania and Uganda Levy taxes on imports at FOB values

FY 2009 Jan- June:- Operationalize Commercial Registration Agency Effectively apply all modules of Asycuda and reinforce valuation

unit in customs FY 2009/2010:- Effectively apply all modules of Asycuda and reinforce valuation

unit in customs

MINICOM, RRA

1.2 Score of Investor Perceptions of regulatory issues, licensing burden, corruption and dispute resolution

Baseline data not available

RIEPA reports Create a conducive environment for both local and foreign investors

FY 2008:- Business Licensing reform Identification and approval of quick win reforms on licensing by

Cabinet FY 2009 Jan- June:- Implementation of the "quick wins" reform Review all licenses, simplify and streamline the most cumbersome

ones to reduce time and procedures taken to issue licenses Conduct baseline survey on investor perceptions

FY 2009/2010:- Monitor and evaluate the implementation of the licensing reform

MINICOM

16 The complete Common Performance Assessment Framework (CPAF) is Available in the Technical Annexes

Expected Performance Public Policy Actions EDPRS Strategic Outcomes

Indicators

Baseline 2006

Targets 2009/2010

Targets 2010/2011

Source of Data

Policy Action

Key Policy Benchmarks/Outputs by Year

Responsibility Centre

32

1.3 Credit to private sector (as % of GDP)

10 12.217 13.1 BNR Monetary Survey

Implement Financial Sector Development Plan

FY 2008:- Implement the National Microfinance (MF) Strategy and Law Establish MF Credit fund, and MF capacity building fund MoU signed between BNR and MINAGRI for the implementation

of the final phase of the Rural Investment facility (RIF 2) FY 2009 Jan- June:- Operationalize MF credit fund and complete feasibility study of

establishing a rural micro-insurance company Adopt appropriate legal and regulatory framework for national

payment systems, credit bureau, and secured transactions 2009/2010:- Establish loan guarantee programs for commercial banks to increase

lending to SMEs

FSDP Secretariat

1.4 Proportion of employers who are satisfied with the performance of TVET graduates

8% 9% 9.5% LMIS Enhance TVET Strategic Policy & Plan in line with market demand

FY 2008:- Publish TVET policy

FY 2009 Jan- June:- Develop and cost TVET Strategic Plan

MINEDUC

EDPRS FLAGSHIP PROGRAM 3: GOVERNANCE EDPRS Strategic Objective: enhancing gains through good governance - Paragraph 4.2.10

2. Enhanced public financial management

2.1 Index for multiyear perspective in fiscal planning, expenditure policy and budgeting

C+ (2007)

B- Budget reports PEFA Reports

Public Financial Management Follows International Best Practices

FY 2008:- Prepare an MTEF implementation guidelines Conduct an assessment of improving Budget Classification

FY 2009 Jan- June:- Introduce and mainstream gender budgeting Align budget calendar to EAC practices Debt management strategy approved by Cabinet

FY 2009/2010:- Revitalize MTEF and integrate it into budget process Study and introduce performance-based budgeting

Budget Unit

17 In the Results Based Logical Framework, the forecast on expansion of credit to private during the 2009/2010 fiscal period has marginally been revised down to 12% to

mitigate any negative impact that may arise because of the ongoing global recession.

Expected Performance Public Policy Actions EDPRS Strategic Outcomes

Indicators

Baseline 2006

Targets 2009/2010

Targets 2010/2011

Source of Data

Policy Action

Key Policy Benchmarks/Outputs by Year

Responsibility Centre

33

2.2 Index of

effectiveness of payroll controls

D+ (2007)

C+ IPPS implementation reports PEFA Reports

Public Financial Management Follows International Best Practices

FY 2008:- IPPIS System Technical Requirements and Functional Requirements Specification carried-out System Gap Analysis carried-out HR-Module (Subsystem) accomplished 2009 Jan- June:- Carryout Data Cleaning from Legacy Systems and Migrate to IPPIS Database FY 2009/2010:- Payroll Module (Subsystem) accomplished

Integrate HR and Payroll Subsystems

MIFOTRA

2.3 Index on quality and timeliness of annual financial statements

C+ (2007)

B- PEFA reports Public Financial Management Follows International Best Practices

FY 2008:- Update and refine the short and long term capacity building needs

assessment Complete development of PublicBooks software

2009 Jan- June:- • Conduct training for short term skills enhancement course and

ACCA part 1 • Test PublicBooks and roll it on pilot basis • Each Budget Agency submits a Fund Accountability Statements for

the FY2007 FY 2009/2010:- Conduct training for short term skills enhancement course and

ACCA part 1&2 Roll out PublicBooks to all budget agencies and integrate it with

IPPS Each Budget Agency submits complete set of Financial Statements

for FY 2008 within 3 months after the end of financial year

Public Account Unit

2.4 Percentage of Internal audit reports submitted

20% of all budget agencies submit internal audit report

30% of all budget agencies submit internal audit report

35% of all budget agencies submit internal audit report

Internal audit reports

Public Financial Management Follows International Best Practices

FY 2008:- Provide training on systems audit

2009 Jan- June:- Adopt and publish internal audit manuals and internal auditors code

of ethics FY 2009/2010:- Conduct systems audits

Internal Audit

2.5 Percentage of Government expenditure audited by OAG

50% both CG entities & districts

55% both CG entities & districts

60% both CG entities & districts

OAG reports Public Financial Management Follows International

FY 2008:- Develop a staff retention strategy Support development of for qualifies staff

2009 Jan- June:- Install improved audit software

FY 2009/2010:-

OAG

Expected Performance Public Policy Actions EDPRS Strategic Outcomes

Indicators

Baseline 2006

Targets 2009/2010

Targets 2010/2011

Source of Data

Policy Action

Key Policy Benchmarks/Outputs by Year

Responsibility Centre

34

Best Practices

Strengthen specialized audit (payroll audit) Implement staff retention strategy

2.6 Percentage of Public enterprise submitting fiscal reports

Limited submission by GBEs and no consolidated reports

50% of GBEs submit fiscal reports; all reports consolidated

60% of GBEs submit fiscal reports; all reports consolidated

Treasury reports

Public Financial Management Follows International Best Practices

FY 2008:- Develop a strategy for government portfolio management (with

clear guidelines on borrowing) Gather annual financial statements from all GBEs

2009 Jan- June:- Analyze and compile reports on fiscal risks posed by GBEs

FY 2009/2010:- Implement and monitor the government portfolio management

strategy

Treasury

2.7 Proportion of the value of procurement tendered competitively or justified

73% 78% 80% RPPA reports Public Financial Management Follows International Best Practices

FY 2008:- Train procurement officers at all levels on new procurement law Publish the independent review (appeal) panel report Develop the institutional and legal framework to support capacity in

procurement 2009 Jan- June:-

Conclude partnership agreement with learning institution in Kigali to develop curricula to provide basic training in procurement

FY 2009/2010:- Review regulations to include provision for justification for

restricted or no competition tendering methods Carry out procurement Audit Provide professional training to procurement officers across

government

RPPA

Public investments management: This version of the CPAF does not contain policy measures relating to the management of public investments. Important policy actions that the Government has prioritized include adoption by Cabinet, in 2009, a new public investment policy to guide the preparation, selection and implementation of public investment projects. The full implementation of the public investment program is expected towards FY 2010/2011. This measure is fully supported by the development partners, including the Bank as evidenced in the various minutes of the Budget Support Harmonization Group. It is also a priority area for the Government and it specifically allowed the Bank to include this policy action as one of the measures to be supported by PRSSP-III. It is expected that subsequent revisions of the CPAF will incorporate this activity.

Appendix III RWANDA

Poverty Reduction Strategy Support Programme (PRSSP-III) Appraisal Report

35

Comparative Socio-Economic Indicators

Year Rwanda AfricaDevelo-

ping Countrie

Develo- ped

CountrieBasic Indicators Area ( '000 Km²) 26 30 307 80 976 54 658Total Population (millions) 2007 9,7 963,7 5 448,2 1 223,0Urban Population (% of Total) 2007 24,7 39,8 43,5 74,2Population Density (per Km²) 2007 369,2 31,8 65,7 23,0GNI per Capita (US $) 2000 250 1 071 2 000 36 487Labor Force Participation - Total (%) 2005 50,5 42,3 45,6 54,6Labor Force Participation - Female (%) 2005 51,2 41,1 39,7 44,9Gender -Related Dev elopment Index Value 2005 0,450 0,486 0.694 0,911Human Dev elop. Index (Rank among 174 countries 2005 161 n.a. n.a. n.a.Popul. Liv ing Below $ 1 a Day (% of Population) 2001 51,2 45,0 32,0 20,0

Demographic IndicatorsPopulation Grow th Rate - Total (%) 2007 2,7 2,3 1,4 0,3Population Grow th Rate - Urban (%) 2007 9,9 3,5 2,6 0,5Population < 15 y ears (%) 2007 42,9 41,0 30,2 16,7Population >= 65 y ears (%) 2007 2,2 3,5 5,6 16,4Dependency Ratio (%) 2007 84,2 80,1 56,0 47,7Sex Ratio (per 100 female) 2007 93,2 99,3 103,2 94,3Female Population 15-49 y ears (% of total populatio 2007 25,6 24,2 24,5 31,4Life Ex pectancy at Birth - Total (y ears) 2007 46,2 54,2 65,4 76,5Life Ex pectancy at Birth - Female (y ears) 2007 47,8 55,3 67,2 80,2Crude Birth Rate (per 1,000) 2007 44,5 36,1 22,4 11,1Crude Death Rate (per 1,000) 2007 17,2 13,2 8,3 10,4Infant Mortality Rate (per 1,000) 2007 112,4 85,3 57,3 7,4Child Mortality Rate (per 1,000) 2007 187,8 130,2 80,8 8,9Total Fertility Rate (per w oman) 2007 5,9 4,7 2,8 1,6Maternal Mortality Rate (per 100,000) 2005 750 622,9 440 13Women Using Contraception (%) 2005 17,5 26,6 59,0 74,0

Health & Nutrition IndicatorsPhy sicians (per 100,000 people) 2005 1,8 38,2 78,0 287,0Nurses (per 100,000 people) 2005 22,8 110,7 98,0 782,0Births attended by Trained Health Personnel (%) 2005 38,7 43,7 56,0 99,0Access to Safe Water (% of Population) 2004 74,0 62,3 78,0 100,0Access to Health Serv ices (% of Population) 2005 37,9 61,7 80,0 100,0Access to Sanitation (% of Population) 2004 42,0 44,2 52,0 100,0Percent. of Adults (aged 15-49) Liv ing w ith HIV/AID 2005 3,1 4,5 1,3 0,3Incidence of Tuberculosis (per 100,000) 2004 371,0 310,2 144,0 11,0Child Immunization Against Tuberculosis (%) 2005 91,0 78,1 82,0 93,0Child Immunization Against Measles (%) 2005 89,0 68,0 73,0 90,0Underw eight Children (% of children under 5 y ears 2005 22,5 39,0 31,0 …Daily Calorie Supply per Capita 2004 2 173 2 434 2 675 3 285Public Ex penditure on Health (as % of GDP) 2003 1,4 5,6 1,8 6,3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 2004/05 119,0 96,7 91,0 102,3 Primary School - Female 2004/05 120,0 90,4 105,0 102,0 Secondary School - Total 2004/05 14,0 43,1 88,0 99,5 Secondary School - Female 2004/05 14,0 36,5 45,8 100,8Primary School Female Teaching Staff (% of Total) 2003/04 51,2 47,5 51,0 82,0Adult Illiteracy Rate - Total (%) 2006 35,1 43,3 26,6 1,2Adult Illiteracy Rate - Male (%) 2006 28,6 34,5 19,0 0,8Adult Illiteracy Rate - Female (%) 2006 40,2 52,4 34,2 1,6Percentage of GDP Spent on Education 2000 2,8 4,7 3,9 5,9

Environmental IndicatorsLand Use (Arable Land as % of Total Land Area) 2005 35,1 6,0 9,9 11,6Annual Rate of Deforestation (%) 2000-05 3,9 0,7 0,4 -0,2Annual Rate of Reforestation (%) 2000-05 9,0 10,9 … …Per Capita CO2 Emissions (metric tons) 2005 0,1 1,0 1,9 12,3

Sources : ADB Statistics Department Databases; World Bank: World Development Indicators; last update :UNAIDS; UNSD; WHO, UNICEF, WRI, UNDP; Country Reports

Note : n.a. : Not Applicable ; … : Data Not Available; * : latest data available within 1995-2000

avril 2008

Inf ant M ort ali t y R at e ( Per 10 0 0 )

0

20

40

60

80

100

120

140

Rwanda Africa

GN I per cap it a U S $

0200400600800

10001200

Rwanda Africa

Populat ion Growt h R at e ( %)

0 ,0

0 ,5

1,0

1,5

2 ,0

2 ,5

3 ,0

Rwanda Africa

Lif e Expect ancy at B irt h ( years)

111213141516171

Rwanda Africa

Appendix IV RWANDA

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Attainment of the MDGs and National Development Targets

MDG Vision 2020 and MDG Indicators 2000

Baseline Target MDG

2015 Latest Value

(2005 & 2006) Meet

Goals? MDG 1 : Eradicate extreme poverty and hunger Poverty (% below national poverty line) 60.4 30.2 56.9 Unlikely

Child malnutrition (% of under-5s underweight) 24.5 14.5 22.5 Unlikely

% of the pop. below min. level of dietary energy consumption 41.3 20.7 36 Likely MDG 2 : Achieve universal primary education Literacy level (% of 15 - 24 year olds) 57.4 100 95 Very likely

Primary school net enrolment (%) 72 100 95 Very likely Primary school completion rate (%) 22 100 51.7 Very likely Gender gap in primary education (%) 0 0 0 Very likely

MDG 3 : Promote gender equality Gender gap in illiteracy (%) 10 0 0.1 Very likely Seats held by females in Parliament (% of seats) 50 48.8 Very likely MDG 4 : Reduce child mortality Children immunized against measles (% of 11-23 month-old) Very likely

Under 5 mortality rate ( per 1,000 births) 196 50 152 Likely

Infant mortality rate ( per 1,000 births) 107 28 86 Very likely MDG 5 : Improve maternal health Maternal mortality rate (per 100,000 births) 1,071 268 750 Very likely Births attended by skilled health personal (% of births) 28 Unlikely MDG 6 : Combat AIDS, malaria and other diseases HIV prevalence (%) 13.9 3.5 Inconclusive

Modern contraception (condom use) prevalence Inconclusive Among 15-24 year-olds (%) 4 39 Inconclusive Proportion of population aged 15-24 years with comprehensive correct knowledge of HIV/AIDS (%) 54 Inconclusive % of school attendance of orphans to school attendance of non-orphans 0.92 Very likely % of population with advance HIV infection with access to ARVs Very likely Prevalence of Malaria (%) 2.4 to 4.9 Very likely Specific mortality associated with malaria (%) 51.1 37.7 Very likely % of children under 5 sleeping under insecticide-treated bed nets 59.7 Very likely Prevalence and death rates associated with tuberculosis (%) 6 Very likely

% of tuberculosis cases detected/cured under directly-observed treatment Very likely MDG 7 : Ensure environmental sustainability Forested land as % of land area 25 Very likely

% Area protected to maintain biological diversity to surface area (%) 10 12 Unlikely % of the population with sustainable access to improved water source 82 64 Very likely % of the population with access to improved sanitation 8 Likely

MDG 8 :Develop a global partnership for development

Proportion of ODA to basic social services (basic education, primary health care, nutrition, safe water and sanitation ) Inconclusive

Proportion of official bilateral HIPC debt cancelled Inconclusive Debt Service as a Percentage of Exports of Goods and Services 10.6 Very likely Telephone Lines And Cellular Subscribers per 100 Population 2.3 Unlikely

Personal Computers in Use and Internet Users per 100 population 0.6 Unlikely Source: Rwanda National Institute of Statistics, Millennium Development Goals, Country Report 2007.

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Macroeconomic Framework – Summary Indicators, 2008-2011/2012

2005 2006 2007 2008

(Est.) S1 20091

(Prj.) 2009/10

(Prj.) 2010/11 (Prj.)

2011/12 (Prj.)

Economic Growth and Inflation Real GDP Growth 7.2% 7.3% 7.9% 8.5% 6% (**) 6%(**) 7.8% 8.0% Nominal GDP Growth per Capita 275 320 376 460 220 529 585 640 Consumer Price Index (annual average)2

9.0% 8.9% 9.1% 15.1% 7.7% 7.0% 5.3% 5.0%

Central Government Budget (% GDP)

Domestic Revenue 13.5% 13.3% 13.6% 13.9% 15.4% 13.0% 13.3% 13.6% Grants 12.7% 10.7% 11.1% 13.1% 17.3% 11.7% 11.0% 9.4% Expenditure and Net Lending 25.6% 24.5% 26.3% 27.4% 32.6% 25.6% 30.1% 27.4% Current Expenditure 16.1% 16.2% 16.7% 16.4% 18.2% 14.8% 14.2% 13.8% Capital Expenditure 9.1% 7.6% 10.0% 11.3% 14.1% 12.3% 11.5% 10.4% Overall Balance (payment order) Including Grants 0.7% -0.4% -1.6% -0.4% 0.1% -1.6% -0.7% -0.5%

Excluding Grants -12.0% -11.1% -

12.7% -

13.5% -17.2% -13.4% -11.8% -9.9% Monetary Sector (annual % change)

Broad Money - Growth 19.5% 30.4% 33.2% 14.0% 12.9% 18.0% 16.5% 16.4% Reserves of the BNR – Growth 19.5% 11.9% 30.7% 22.3% - 18.0% 1.3% -4.6% Private Sector Credit 12.4% 13.5% 13.9% 20.0% -18.4% 10.5% 31.8% 39.3% Gross Investment - 20.4% 21.0% 23.4% - 20.1% 20.9% 13.4% Gross National Savings - 4.3% 5.4% 5% - -4.6% 17.6% 8.3% Balance of Payments (million USD)

Exports of Goods 125 147.4 176.8 221.2 121.1 278.1 327.8 380.4 Imports of Goods -361.9 -446.4 -581.2 -824.1 -389.2 -809.6 -924.7 -984.0 Current Account Balance as % GDP4

-2.4% -7.3% -4.9% -8.2% -2.9% -5.8% -6.6% -7.2%

Overall Balance as % GDP 5.0% 2.9% 3.2% -1.2% 5.0% 1.5% 0.1% -1.0% Gross Official Reserves5 6.2 6.3 6.4 4.6 - 7.7 7.2 6.3 External Debt as % GDP 70.7% 16.9% 16.8% 15.4% - 14.9% - -

Source: MINECOFIN, IMF and ADB Staff Projections. Notes: 1 Semester One 2009: January to June.

2 Excluding demobilization spending. 3 Excluding grants. 4 Including official transfers. 5 Months of imports of goods and services. (**) projections for GDP growth in 2009 have been revised downwards to 6% due to the impact of global recession. Original estimates were: S1 2009, 7.2% and 2009/10, 7.4%.

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Analytical Underpinnings

Area Analytic Work

Improving Business Environment

• Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding (GoR for IMF, 2008)

• Country Economic Memorandum (World Bank, 2008) • Country Strategy Paper (AfDB, 2008) • Doing Business Surveys (World Bank, 2009) • Investment Climate Assessment (IFC/World Bank) • Debt Sustainability Analysis Update (World Bank, 2008) • Economic Development and Poverty Reduction Strategy, 2008

to 2012 (GoR). • Budget Framework Paper 2009 – 2011/12 (GoR) • Heavily Indebted Poor Countries (HIPC) Initiative and

Multilateral Debt Relief Initiative (MDRI)—Status of Implementation (World Bank, and IMF, 2008)

• Poverty Reduction and Growth Facility (IMF, 2008) Deepening Financial Services

• Financial Sector Development Plan (GoR, 2007) • Financial Sector Assessment Program (IMF/World Bank) • The FinScope Rwanda 2008 findings (Funded by DFID)

Improving Public Financial Management, Transparency and Accountability

• Public Expenditure and Financial Accountability (PEFA) assessment (2007)

• Joint Governance Assessment (2008) • Fiduciary Risk Assessment (DFID, AfDB & Government, 2008) • PFM Reform Action Plan. • Public Expenditure Review (ongoing)

Appendix VII RWANDA

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ADB’s Portfolio in Rwanda

(As at 31 December 2008)

Project/Programme Title Sector Board

Approval Finish Date AMT (UA) Status Rated? Problematic?1 BUGESERA Agricultural Development Project Agriculture 7/24/2006 12/31/2012 10,000,000.00 OnGo Yes No 2 Forestry Management Project (PAFOR) Agriculture 11/14/2001 12/31/2009 8,900,000.00 OnGo Yes No

3 Dairy Cattle Development Support Project (PADEBL) Agriculture 10/31/2000 6/30/2009 13,500,000.00 OnGo Yes No

4 Integrated Development & Management of In-land Lakes –PAIGELAC Agriculture 10/6/2004 12/31/2011 14,760,000.00 OnGo Yes No

5 Institutional Support for Environmental Management (PAIGER) Environment 7/9/2003 6/30/2009 1,000,000.00 OnGo Yes No

6 Rural water Supply & sanitation Project (AEPA)

Water and sanitation 17/12/03 31/12/09 13,000,000.00 OnGo Yes No

7 Urban Water & Electricity Supply Project (AEPE) Multi-Sector 7/9/2003 12/31/2009 18,770,000.00 OnGo Yes No

8 PRSS II - General Budget Support Multi-Sector 18/07/07 31/12/09 33,000,000.00 OnGo Yes No

9 Rehabilitation/Construction of Primary Schools and KIST Social 12/2/1998 4/30/2009 20,780,000.00 OnGo Yes No

10 Support to Education Sector Strategic Plan Social 6/21/2006 12/31/2011 15,000,000.00 OnGo Yes No 11 Support to National AIDS Program Social 7/22/2003 12/31/2010 2,000,000.00 OnGo Yes No 12 Roads Infrastructure Project (PIR) Transport 10/8/2003 12/31/2010 15,000,000.00 OnGo Yes No 13 Ngororero-Mukamira Road Project Transport 20/12/2004 31/12/09 15,200,000.00 OnGo Yes No TOTAL 180,900,000.00

Recent Approvals

Project/Programme Title Sector Board Approval Finish Date AMT (UA) Status Rated? Problematic?

1 Support To Science And Technology Skills Social 11/11/2008 12/31/2015 6,000,000.00 APVD N/A N/A

2 Competitiveness and enterprise dev. Project Multi-Sector 12/29/2008 12/31/2012 5,000,000.00 APVD N/A N/A

TOTAL 11,000,000.00

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IMF Country Relations Note

IMF Executive Board Concludes 2008 Article IV Consultation with Rwanda Public Information Notice (PIN) No. 09/14 February 6, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 12, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Rwanda.1 Background Over the past decade, Rwanda's economic performance has been strong, backed by sound macroeconomic and structural policies and substantial donor assistance. During this period, real GDP growth has been robust at 7 percent on average and inflation has been generally low. Rising revenues and assistance from international donors created fiscal space to scale up public spending, including on pro-poor initiatives. Rwanda qualified for debt relief under the Heavily Indebted Poor Countries Initiative (HIPC) in 2005 and benefited from Multilateral Debt Relief Initiative (MDRI) in 2006, which significantly reduced its external debt. Rwanda's external position has strengthened with the aid flows, allowing an adequate reserve coverage of imports. Rwanda is advancing toward the Millennium Development Goals (MDGs). It has made significant progress in achieving the objectives on universal primary education, gender equality and empowering of women, and reducing child mortality. Nonetheless, poverty remains pervasive. The Rwanda's macroeconomic policies have been supported by a three-year Poverty Reduction and Growth Facility (PRGF) arrangement, which was approved in June 2006. The program is designed to maintain macroeconomic stability while setting the stage for stronger growth and poverty reduction. Policy implementation under the PRGF-supported program in 2008 has been satisfactory. Growth is expected to reach 8.5 percent, reflecting buoyant activity in the agriculture, manufacturing, construction, and services sectors. Nevertheless, inflation accelerated to double digits in the second half of the year, reflecting the impact of international commodity prices and expansion of domestic demand. The fiscal stance was tighter than envisaged in the first half of the year, largely reflecting strong revenue performance. The monetary program also remained broadly in line with the program. The authorities made good progress in implementing the structural reforms agenda. In particular, in the second half of 2008 the authorities finalized a medium-term action plan for the public financial management reform, the national payments strategy, designed to improve the payments infrastructure and address the development of basic payment services in Rwanda, and the debt management strategy, which sets the limits for external debt accumulation consistent with the medium-term fiscal policy objectives.

41

Executive Board Assessment Executive Directors commended the Rwandan authorities for implementing sound macroeconomic policies and important structural reforms over the past years. These policies and reforms helped achieve high economic growth, keep inflation relatively stable, and improve debt sustainability. Downside risks to the near-term economic outlook have increased because of the global financial crisis and economic slowdown. Also, poverty remains widespread, and social indicators lag behind those of many other African countries, despite high economic growth rates. Over the medium term, Directors emphasized that the main challenge will be to maintain high and broad-based economic growth and reduce persistent poverty, while pursuing macroeconomic stability and debt sustainability. Directors considered the authorities' macroeconomic policy framework and structural reform agenda to be appropriate for tackling these challenges. They encouraged the authorities to implement cautious fiscal and monetary policies that would ease inflation and possible balance of payments pressures without stifling economic growth. Continued determined implementation of structural reforms will be important to raise investment rates, expand the private sector, deepen the financial sector, and diversify the production and export base. Directors commended the authorities' prudent fiscal stance, which focuses on priority spending while containing inflationary pressures and keeping debt at a sustainable level. They observed that while Rwanda's revenue collection has improved, it is still relatively low. They encouraged the authorities to monitor revenue developments carefully, and to further enlarge the tax base and strengthen tax administration in order to reduce over time Rwanda's substantial aid dependence. Directors underscored the importance of improving public financial management and, in this regard, welcomed the efforts to improve the institutional framework for formulating and executing the public investment program. Executive Directors supported a scaling up of public investment in view of Rwanda's substantial development needs. They encouraged the authorities to rely on grants and highly-concessional loans for its financing in order to safeguard debt sustainability gains. In this respect, Directors welcomed the authorities' development of a comprehensive debt management strategy, which sets limits for loans and loan guarantees. They recommended that the debt strategy incorporate the fiscal risks associated with contingent liabilities, particularly those relating to planned public-private partnerships. Directors stressed that the financing of infrastructure projects should be consistent with a well-prioritized medium-term expenditure framework. Directors noted that domestic demand pressures and higher world food and fuel prices led to an acceleration of inflation in the second half of 2008. Although recent signs of easing core inflation are encouraging, Directors supported the authorities' tight monetary stance to contain the second-round effects of the commodity price shocks. They recommended that steps be taken to raise interest rates to positive levels in real terms. They encouraged efforts to improve liquidity forecasting and management, particularly through better coordination of monetary and fiscal policies. Directors noted the staff assessment that the real exchange rate of the Rwandan franc is broadly in line with economic fundamentals, although rising inflation led to real appreciation pressures toward the end of 2008. In this context, they welcomed the authorities' commitment to increase nominal exchange rate flexibility and subordinate the foreign currency sales to monetary policy objectives. Directors underscored the importance of structural reforms and of the removal of infrastructure bottlenecks to safeguard Rwanda's external competitiveness.

42

Directors commended the measures taken in recent years to strengthen the banking sector, including the passage of legislation in October 2008 to counter money laundering and terrorism financing. Noting that credit and operational risks remain high, Directors welcomed the central bank's intention to improve banking regulation and supervision. They looked forward to the timely implementation of the financial sector development plan. Directors welcomed the authorities' commitment to promote private sector-led diversified growth and employment generation. They supported the reforms to improve the investment climate, and attached high priority to measures aimed at addressing land use and other structural problems that hinder agricultural development. They encouraged further trade integration with the East African Community. Given Rwanda's financing and capacity constraints, Directors underlined the importance of properly calibrating the scope, timing, and pace of reforms.

Rwanda: Selected Economic and Financial Indicators, 2006-09 2006 2007 2008

Proj. 2009Proj.

(Annual percentage changes, unless otherwise indicated)

Output and prices

Real GDP growth 7.3 7.9 8.5 6.0

Real GDP (per capita) 5.4 5.7 6.2 3.8

GDP deflator 9.4 10.5 15.3 10.7

Consumer prices (end of period) 12.2 6.6 22.0 6.0

External sector

Export of goods, f.o.b. (in U.S. dollars) 16.9 20.1 25.4 6.2

Imports of goods, f.o.b. (in U.S. dollars) 26.2 30.2 43.9 5.9

Export volume 12.7 6.2 13.0 19.3

Import volume 27.0 31.0 24.0 14.6

Terms of trade (deterioration = -) 4.3 13.7 -4.4 -3.7

Money and credit

Net domestic assets1 1.3 7.3 1.3 14.1

Domestic credit1 7.8 9.7 1.3 10.2

Of which: Economy1 13.8 11.8 10.8 15.5

Broad money (M2) 31.5 30.8 13.6 17.0

Reserve money 11.9 30.7 22.3 18.0

(Percent of GDP)

National income accounts

National savings 4.3 5.4 5.0 5.1

Gross investment 20.4 21.0 23.4 23.5

Government finance

Total revenue (excluding grants) 13.3 13.6 14.2 14.4

Total expenditure and net lending 24.5 24.9 27.1 27.0

Total expenditure and net lending, excl. privatization 24.5 26.1 27.7 27.0

Primary fiscal balance -2.1 -3.5 -3.1 -4.5

Domestic fiscal balance -5.4 -6.1 -6.5 -6.8

Overall balance, after grants -0.4 -1.5 0.1 0.9

43

External sector

External current account balance, including official transfers -7.4 -4.9 -7.1 -8.2

External debt (end of period) 16.9 16.8 15.4 14.9

Gross reserves (in months of imports of goods and services) 5.6 5.2 5.1 4.6

(Millions of U.S. dollars)

External debt (end of period) 477.6 574.2 652.8 726.2

Gross official reserves 439.6 552.4 599.0 581.0

Memorandum item:

Nominal GDP (billions of Rwanda francs) 1,563.8 1,866.1 2,333.1 2,737.6

Sources: Rwandese authorities; and IMF staff estimates and projections. 1 As a percent of the beginning-of-period stock of broad money.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs Media Relations Phone: 202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278

Fax: 202-623-6772

Appendix IX RWANDA

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Map of the Project Area