Document of The World Bank FOR OFFICIAL USE ONLY t}. !' -? 5/ C - J Z Repowt No. P-5544-RW REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 67.5 MILLION TO THE RWANDESE REPUBLIC FOR A FIRST STRUCTURAL ADJUSTMENT PROGRAM MAY 29, 1991 This document has a restrkted distribution and may be used by recipients only in the performsmce of their official duties. Its contents may not otherwise be disclosed without World Bonk authorization. CURRENCY EQUIVALENTS Since September 1983, the Rwandese Franc has been pegged to the SDR. The rate remained unchanged at SDR 1.00 = RF 102.71 until November 10, 1990, when the Rwandese Franc was devalued to SDR 1.00 = RE 171.18. MEAS ES AND EOUI_ALENTS Metric System FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AG@D ACRONYMS BRD Rwandese Development Bank CND National Council for Development (Parliament) COPIMAR Mining Cooperative ELECTROGAZ National Water and Electricity Company LIR Liberalized Import Regime LRMC Long Run Marginal Cost NGO Non-Government Organization OAU Organization of African Unity OCIR Promotion Agency for Export Crops OGL Open General License ONAPO Population Agency ONATRACOM Public Transport Company PE Public Enterprise PEP Public Expenditure Program PIP Public Investment Program REDEMI State Mining Company RWANTEXCO Rwanda State Textile Company SAF Structural Adjustment Facility SAL Structural Adjustment Credit SAP Structural Adjustment Program SGS Soci6t4 Gen6rale de Surveillance (Swiss Preshipment Surveillance Company) SOE Statement of Expenditure SONATUBE State Pipe Factory SPA Special Program of Assistance for Africa STIR National Transport Company FOR OmCIc USE ONLY FIRST a.WM= CR8UDIT Tale of 2ontent am redlt andProjectSummary ........ ... -Li to COUWTRY POLICIE$ AND AN GROP ASSISTANC STRATEGY A. Background . . . . . . . . . . . . . . . . . I1 S. RecantMaoroaecoeic Perfoarance .......... 2 (l) Devloentsdurngl987-89 ...... . 2 (2) De.lopmnts during1990 . . . . . . .9 3 C. Gov'ernment Economic ?olice.e . . .. . . . .4 0. rinancing equiremete .......... ..... 6 3. BankGroupAseLtance Strategy . . . . . . . .. 6 i?. SAkL I PPOGRAM . . . . . . . . * * . . . * . . - . . . 8 A. Exchange and Trade Policy Refcrm . . . . . . . . . 9 Exchange Rate Reglme 4944.9449494. 9 9 Forelgn Exchange Allocation and iMport Liberalization 9 Tariff Regime . . . . . . . . . . . . . . . . . . 11 S. Incentives for Private Sector Development . . . . . 11 Price Decontrol ................. 11 Regulatory Framework ........ .. ... . 12 C. Supply-Side Measures ...... ... * 13 Coffee Sector # . . . * . . . . . . . . . . . . . 13 Energy sector . . . . . . . . . . . . . . . 14 a. Public Resource Management 9499449994999 15 Programming and Monitoring of Public Xxpenditures 1S Civil service Reform .... .......... 16 TaX Reform . . . . * . . . . * . . . * . . . 16 Publlc nterprise Reform ............ 17 3. Social and lnvironmental Aspects . 18 III. TUBPROPOSEDCREDIT ..................... . 19 A. Credit History ... .. . . . .. . .. . . . . .. . . 19 S. Crodit Amount and Borrower . .. ....... 19 C. Management and MonltorLng of the Program . . . . . . 19 D. DLebursement and Procurement . . . . . . . . . . . 19 S. MonLtorable ActLons .. .... ...... 20 F. Benefits and Rlks ........ .. .. . 21 . RECOKEMDATIOM . . . . . . * *. . . . . . 23 Annex A Key Procesalng Events. . .24 Annex B Letter of Development Pollcy ........ 25 Annex C SAL Policy Matrrx............. 42 Annex D Key indicators ............. . 45 External Financlng: Reuirements and Sources 46 Balance of Payments, 1987-9s . . . . . . 47 Social Indicators of Development, 1990 . . . 48 Annex 3 Status of Bank Group OperatLons ln P.,anii . 50 Annex F Bank's Assistance to Date ln Rwanda 52 Annex C Map of Rwanda........ . . 53 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclsed without World Bank authoriation. RWAUDRsE REPUBLIC FIRST STRUCTURAL ADJUSTMENT CRE2DI CREDIX AND PROJECT SUMMARY orrowers IRwandese Republic Amounts IDA Credit of 8DR 67.5 million (US$90 million equLvalent) Cofinangina: Switzerland (SwF 10 million); Belgium (BF 400 million); cordinated financing is being negotiated with the African Development Bank (AfDB), the European Community (EDP) France, Austria, Germany, USA, and Canada. The total external cofinancing associated with this credit amounts to about US$140 million equivalent. Tsnms: Standard IDA Terms aroara 20scriptiont The proposed Structural Adjustment Credit (SAL) will support the first phase of the Government's economic reform program as described in its Policy Framework Paper (PFP) for 1991-93. The main objectives of the Program are to stabilize the economy, improve its competitiveness, create an incentive framework for the efficient allocation of resources, lay the foundation for export-led growth and for improved living conditions for the Rwandese people. Specifically, the credit will support measures to: (i) establish and maintain a competitive exchange rate and a more liberal foreign exchange allocation and trade regimet (ii) liberalize domestic trade, simplify and reduce the regulatory environment; (iii) alleviate institutional and production constraints in key sectors (coffee, and energy); (iv) establish a process of public expenditure programming; (v) provide a satisfactory social "safety net" within the framework of an agreed public expenditure program and consistent with a sound macroeconomic framework; and (vi) initiate policy reforms dealing with taxation, labor legislation and civil service. Benefits and Rinka: The proposed SAL is expected to contribute to the restoration of internal and external financial and economic equilibria. The proposed measures to improve economic incentives are also expected to have a positive impact on economic growth and employment creation in the private sector. The major risk is the Government's ability to stay the course of adjustment in a period of ethnic unrest. The Government has so far demonstrated its commitment to the reform process by implementing politically dlfficult policy measures. The second risk is that inadequate foreign exchange availability may slow down the pace of trade liberalization. This risk is minimized by the strong support of the international - Li - community in mobillizng quLck disbursing support for the adjustment program. Estimated Dicbtn"w3ents: The proposed Credit will be disbursed in two tranches. The first tranche of US$55 million equivalent would be released upon effectiveness, and the second tranche approximately eLght to ten months later. Glven the urgent need for balance of payment assiLtance, retroactive financing will be allowed for up to 20 percent of the Credlt for expendlturee Incurred not earlier than four months before credlt approval date. NAW: IBRD 22995 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE RWANDESE REPUBLIC FOR A FIRST STRUCURA ADJUSTMENT CREDIT 1. I submit the following report and recommendation on a proposed First Structural Adjustment Credit (SAL) to the Rwandese Republic for SDR 67.5 million (US$90 million equivalent), on standard IDA terms, with a mat'irity of 40 years, to support the Government's structural adjustment program (SAP). The Governments of Switzerland and Belgium are cofinancing the proposed adjustment credit in the amount of SwF 10 million (about US$7.5 million equivalent) and SF 400 (about US$18.3 million equivalent) respectively. In addition, a number of bilateral donors are providing coordinated financing: Austria (about $6.2 million equivalent), Canada (about US$10.3 million equivalent), the European Development Fund (about US$18.8 million equivalent), France (t-out $13.2 million equivalent), Germany (about $16.0 million equivalent), the United States (US$20 million) and the African Development Bank (about US$15.6 millior. equivalent). 2. A Policy Framework Paper (PFP) for the period 1991-93 was discussed by the Committee of the Whole on April 23, 1991. The first annual arrangement under the Structural Adjustment Facility (SAF) was approved by the IMF Executive Directors on April 24, 1991. Part I of this report provides an overview of Rwanda's development problems, prospects, the key priorities for reform, and the Bank's assistance strategy. A description of the Government's SAP to be supported by the SAL is presented in Part II, while Part III describes the features of the proposed Credit, identifies specific performance conditions attached to it, and evaluates the potential risks of the program. The Government's Letter of Development Policy is presented in Annex B. Data on key indicators and external financing requirements are provided in Annex D. PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEZY A. Backaround 3. Rwanda is a small, largely mountainous landlocked country, with scarce natural resources whose exploitation is hampered by the long distances to the nearest sea ports. It is the most densely populated nation in Africa (290 inhabitants per square kilometer) and has one of the world' fastest demographic growth rates (3.7 percent per annum). The country is populated by two main ethnic groups (Butus, the majority tribe, and Tutsis who constitute about 15 percent of the population). Ethnic conflicts led to a massive exile of Tutsis in 1959. since independence in 1962, the two groups had cohabited relatively peacefully until the eruption of violence in late 1990. The country is heavily dependent on foreign assistance to finance its import requirements. To alleviate this dependence, over the past three decades authorities followed a development strategy centered on achieving self-sufficiency, in food in particular. This approach was feasible as long as arable land could be expanded. In implementing this strategy, the Government generally favored the rural areas in pricing policy, public expenditure priorities, and in developing effective rural institutions and - 2 - infrastructure. However, that strategy has recently come into question as the population grcwth rate has begun to outstrip that of food supply, clouding the country's long-term devalopment prospects. 4. In the 1960. and the 1970s, Rwanda pursued prudent financial policies and Government intervention in the economy was selective and generally limited. These policies resulted in sustained growth in per capita income and one of the lowest levels of external indebtedness in Africa. However, in the 1980s, in response to external shocks and the collapse of coffee prices (the main export), the authorit.es reaorted to increased controls over the economy instead of adjusting to the new environment and maintaining the competitiveness of the economy through a flexible exchange rate policy. This led to a decade of steadily declining per capita income. 5. After nearly three years of intensive dialogue, the Government requested the help of the Bank and the IMF in preparing an adjustment program. A PFP had been negotiated with the authorities and a Bank mission was ready to depart to appraise the First SAL in October 1990, when the country was invaded by Tutsi refugees from abroad. Fighting spread briefly to Kigali, the capital city, but within few weeks the Government was able to reassert its control over the country. Diplomatic efforts with neighboring countries to find a political solution to the conflict and President Habyarimana's decision to initiate a process of national reconciliation and political reform led to a formal cease-fire, which was signed on March 29, 1991. In parallel with the economic reform program, the Government is pursuing a process of democratization which is expected to lead shortly to increased political pluralism. On April 28, 1991 a new draft constitution was approved by the Mouvement National Revolutionaire pour le Developpement, the ruling political party. The draft constitution is currently under consideration by the National Development Council (the Parliament) and multi-party elections are expected to take place before the end of the year. B. Recmnt Macroeconomic Performance 6. In the 19709, Rwanda experienced relatively high economic growth -- 4 percent on average a year -- under conditions of relative financial stability and low inflation. However, following the coffee boom of the late 1970'B, Government embarked on an ambitious public expenditure program (PEP). When coffee prices returned to trend levels in the early 19806, and the external terms of trade declined by more than one third, the Government adopted restrictive fiscal policies and restrained public expenditures as measures to restore the country's competitiveness. At the same time, though, the authorities increased the scope of Government intervention in the economy. Beginning in 1983, for instance, price controls were applied more strictly to prevent prices of imported goods from rising excessively as a result of tightened import licensing. Similarly, transfers for payments of invisibles were restricted. Moreover, inefficient industrial enterprises were protected through the imposition of *temporary" import prohibitions on competing imports. By the mid-1980s, the fiscal and financial situation had somewhat improved but annual GDP growth had averaged only 2.5 percent during the first half of the decade, a rate below the population growth rate. - 3 - 1. Dee_met dn.1970 7. Since early 1987X Rwanda has been faced wlth preclpltous declines in world coffee prlces and unfavorable climatic conditions, which have had an adverse impact on agrlcultural productLon. As a result, primary sector output decline by about 14 percent over the perLod 1988-89. etrictiLt?e import licensing lntroduced to respond to forelgn exchange scarcities caused a slowdown 'n several activitLes. Real GDP stagnated ln 1988 Fnd declLned sharply ln 1989 (5.7 percent). Inflatlon as measured by the official consumer price index remained low (2.7 percent per year on average since 1986) malnly due to the overvaluation of the national currency. 8. Rwanda's balance of payments situation has been under pressure since 1987, largely because of poor export performance. Despite sharply curtaLled imports from 1987 to 1989, representing a decline of about 13 percent in real terms, the current account deficit (excluding official transfers) remained at 10.7 percent of GDP in 1989. The deterLoration in export performance cannot be explained solely by the fall in world coffee prLcesg the quallty of Rwandese coffee has also declined due in part to a producer price policy that does not recognize a prsmium for quality. Non- coffee export performance has also been mediocre largely because of the highly overvalued exchange rate, low productivity, and qxcessive regulations and controls. In the past, Rwanda has generally been able to finance its modest external deflcits through highly concessional external assietance, which explains the country's relatively low debt service ratio (18 percent of exports and goods and non-factor services in 1989). Since 1987, however, the authorities have increasingly relied on foreign exchange reserves to finance the balance of payments deficits. As a result, net reserves declined steadily from the equlvalent of 5 months of imports in 1987 and had virtually disappeared by end-1990 desplte the introduction of tighter import restrictions. 9. Notwithstanding the Government's efforts to contain the growth of public expendLture, the fiscal deficit remains at an uneustainable level. Since 1980, the Government has controlled the wage bill by limiting civil service wage increases to the annual 3 percent merit increase. In addition, there hare been cuts in the allocation for goods and services as well as for investment expenditures. However, in view of the overvaluation of the exchange rate and the declining world prices for coffee, the burden on government finances of maintaining an artificially high producer price for coffee had become increasingly difficult to sustain: during 1987-89, average annual transfers to coffee producers accounted for 1.3 percent of GDP or 9.6 percent of total current public outlays. On the revenue sLde, the tax base is narrow, with strong reliance on trade and a few sales taxes. For most taxes, there are problems of administration and collection. Although the fiscal deficit as a percentage of GDP declined from the high level of 10.4 percent recorded in 1987, it was stlll 7.3 percent in 1989. Financlng of this deficit required recourse to local borrowing. The domestic debt burden, which grew from 12 percent of GDP in 1987 to 17 percent ln 1989, is becomlng an lncreasingly important drain on public resources. 2. Develonmente durina 1990 10. The economic and financlal situatLon deteriorated further in 1990, especially during the last quarter when the country faced the invasion from abroad. Despite the recovery of agrLcultural production, - 4 - mainly coffee, the hostilLtLes serLously affected the economy, and ODP La estimated to have d.elined by 2 percent. The moat severely affected sectors were transportation, trade and tourLsm. On the fLocal front, tho outbreak in hostilltles neceseLtated a substantial Lncrease in securLty- related outlays. Also, the transfers to coffee producero almost doubled, despite the reduction of the producer prlee for coffee from RP 125/kg to RF 100/kg at the beginnLng of the 1990/91 season. These factors led to an Lncrease in current expendLture by 30 percent. Capital outlays fell by 11 percent as implementation of projects alowed down slgnifiLantly because of the hostilLtLes. On the revenue oide, tax revenue fell by 11 percent due to the decline in economic activlty and lower imports. For these reasons, the fiscal deflict rose to 11.7 percent of GDP and was largely financed by accumulatLng domestLi arrears and heavy recourse to the domestic bankLng system. Domestic debt thus ln¢reased to 20.3 percent of GDP in 1990. 11. In the external sector, the volume of coffee exports rose by 60 percent ln 1990 owing to a good coffee crop and a reductlon ln stocks. However, the value of coffee exports rose by only 18 percent, sinca coffee prices declined by 26 percent. As other exports declLned due primarlly to the overvalued exchange rate, total exports remained virtually unchanged from the previous year. Imports of merchandies fell by 8 percent, with military imports rising and others declining due to shortages in foreign exchange and a decline in project-related imports. The unstable security situation also affected receipts from tourism. Overall, the current account deficit remained around 10.5 percent of GDP. It was largely financed by a further drawing on net foreign exchange reserves which were completely depleted by end-1990. The accumulation of external arrears amounted to about $7 mLilLon and the outstanding external debt rose to the equivalent of 28.8 percent of GNP, while the debt service ratio declined to 17.7 percent because of the cancellation of the debt owed to France. C. Government Egonomic Pollcles 12. To address these serious economie and financial problems, the Government adopted an econonic reform program described in the PFP for 1991-93 and discussed with the Executive Directors in a Committee of the Whole session on April 23, 1991. The basic macroeconomic objectives of the program are to accelerate the return to a viable external and domestic financial position, and to achieve sustainable economic growth in the context of low inflation. The new strategy represents a clear break from the policies of the eighties because lt stresses reliance on market forces and the private sector, as well as a stronger export-orientation. The key targets of the program are to restore economic growth to about 4 percent and return to an annual inflation rate of 5 percent by 1993, whle reaching a sustainable budgetary and balance of payments sltuation. 13. Agriculture, which accounts for roughly 40 percent of GDP, will continue to be the mainstay of the economy and is expected to grow at 3.7 percent p.a. for the period 1992-1995. Although the small domestic market offers limited prospects for import substitution in lndustry, there are good prospects for growth in light manufacturing. Industrial sector growth (including mining) is expected to average 4.2 percent p.a. between 1992 and 1995. Growth in trade and tourism is projected at 4 percent p.a. during the same poriod. 14. To achieve these objectives, the program aLms ats (i) fostering an environment conducive to promoting private sector activity and international competitiveness; (ii) impr4 ing and rationalLzing public - 5 - resource managements (iii) developing the humAn resource base; and (iv) improving the management of natural resources. To improve Rwanda's international competitiveness, the Government has undertaken an important exchange rate adjustment in November 1990 (see vara. 1?) and has decided to adjust the level of the exchange rate subsequently, as neededg it will also liberalize foreign exchange allocation and the trade regime. The exchange rate adjustment should improve the competitiveness of exports. For example, mining exports (tin, wolfram), which had accounted for 10-15 percent of export earnings up to 1985 and had practically disappeared since then due to the overvaluation of the exchange rate, are expected to regain their competitiveness. To promote private sector involvement in the economy, the Government has decided to eliminate price controls and encourage enterprise creation by setting up transparent, clear and simple administrative procedures for enterprise creation by eliminating the discretionary power of public offlcials. In the agricultural sector, the key objectives are to increase yields, diversify production and exports, and achieve food security in an environmentally sustainable way. With regard to public sector management, the intention is to reduce the public sector deficit, strengthen tax administration and review the tax system to improve production incentives. On the expenditure side, the Government's aim is to improve programming and control of public expenditures, ensure a social "safety net" to protect the most vulne vie groups from the financial austerity measures, and implement a comprehensive reform of the public enterprise sector which has already started with IDA assistance. 15. Under the PFP scenario, gross investment would be maintained at about 16 percent of GDP with the share of private investment increasing slowly to 9.2 percent in 1995 in response to improvements in the policy environment. Domestic savings are expected to increase and reach 8 percent of GDP in 199S. The Government's economic reform program will be accompanied by prudent fiscal and financial policies. The objective is a sustainable overall fiscal position made possible by reducing expenditures (especially, eliminating coffee subsidies) and increasing Government revenues. The fiscal deficit (excluding grants) is expected to be reduced gradually from 11.7 percent of GDP in 1990 to S.2 percent by 1993. The measures being adopted under the adjustment program will not result in an immediate improvement in the trade balance, as imports will have to increase over the program period to restore growth, while export promotion measures will take time to yield results. Nevertheless, the ratio of exports to imports of goods and services is projected to increase from about 42 percent in 1990 to about 47 percent in 1995. The current account deficit (excluding transfers) is expected to increase to 15.2 percent of GDP in 1991 and to decline gradually thereafter to reach 11.4 percent of GDP in 1993 and 9.8 percent in 199S. Rwanda has a relatively low external debt (outstanding debt was 28.8 percent of GDP in 1990) and the Government intends to pursue a prudent external debt management policy by relying exclusively on concessional loans. 16. The benefits of improved overall economic management will be short-lived if major progress is not achieved in dealing with long-term structural issues. Of utmost importance in this respect is the implementation of population and environmental policies already in place. Indeed, the Government has adopted a National Population Policy and an action program emphasizing motivational campaigns and providing for a greater availability and coverage of family planning services, as well as measures to reduce infant mortality. The ultimate goal of this policy is to reduce population growth from 3.7 percent to 2.7 percent by the year 2000. The Government has also prepared an Environmental Action Plan - 6 - (reforestation, industrial locatione effluence control, and soil preservation) as the necessary framework for maintaining and improving soil fertility, while ensuring that environmental guidelines are adhered to ln all development projects. 17. Despite the difficult political situation, the authorLties began implementing some of the key policy reforms since late 1990. The most important measures taken ares (i) a devaluation of the Rwandese franc by 40 percent in foreign currency terms vie-&-vie the SDR (66.7 percent in local currency) to improve the country's competitiveness; (ii) increases in the minimum interest rate for one-year deposits to 12 percent, and the maximum lend.4!: rate to 19 percent, while at the soa time freeing all other interest rates on deposits and introducing a unified rediscount rate of 14 percent; (iUi) increases in petroleum prices by 79 percent on average to pass through the full impact of the devaluation (the new price of gasoline is equivalent to US$3.80 per gallon); (iv) elimination of export taxes, except for coffee; (v) raising the minimum import duty to 10 percent; and (vi) increases in the sales tax from 6 to 10 percent for most goods, from 2 to 5 percent for essential commodities, and from 1 to 10 percent for services and entertainment. D. Financina Requirements 18. The attainment of the Government'e growth and investment objectives will depend not only or, the appropriateness of its economic and financial policies but also on the availability of timely and adequate external financial assistance. Total external capital requirements for 1991-93 (including grants) are estimated to average US$332 million per annum. Those estimates assume that: (i) net external reserves will be restored to the equivalent of about three months of imports by 1993; and (Ui) the political and military situation will gradually return to normal during 1991 and that military outlays will be reduced, beginning in 1992 (as already noted, a cease fire was agreed on March 29, 1991). Grants are expected to average US$130 million a year, which is consistent with past trends. Gross inflows from the existing loans and credits in the pipeline are estimated to average US$38 million a year, of which about US$14 million is expected to come from IDA project financing. After taking into account net direct investment, which is projected to average US$9 million annually, expected disbursement from new projects (US$:i4 million per annum), additional resources from IDA credits for structural and sector adjustment (US$45 million on average per annum), and the IMF's SAP (US$15 million on average per annum), the total financing gap would amount to US$110 million for 1991, US$38 million for 1992 and US$36 million for 1993. At a special meeting called by the Bank and held on March 20, 1991 in Paris, donors confirmed that the gap for 1991 would be financed in the form of highly concessional balance of payments assistance (see par&. 25). S. Bank Groug Assistance Strateoq 19. The Bank Group's current assi.tance strategy in Rwanda was discussed by the Executive Directors in December l1i90. The Bank's main objective in Rwanda is to get the country back on the path to sustained growth with equity. The immediate priority is to support a comprehensive adjustment program focussing on a stabilization of the economy, better resource management and the creation of an enabling environment for private initiative and for export growth and diversification. The long- term strategy is to further increase per capita income by reducing population expansion, diversifying the economy's sources of growth, improving income distribution and protecting the environment. The full range of instruments, including policy dialogue, lending, economic and sector work and aid coordination, will be used to implement this strategy. Recent government reforms open the way to a lending program which will blend qulck disbursiag adjustment operations with Lnvestment projects. 20. The current program consiste of two to three operations a year, including a serles of structural and sector adjustment operations 1J. The proposed SAL describod ln thie report is fully consistent with the country strategy and wlll support the setting in place of an overall macroeconomic policy framework which will be compleented by high priority projects as well as sector operations supporting specific pollcy measures and investments. These operations would develop the lnfrastructure needed to help promote private sector initiative as well as address long-term development issues in education, population and health. Future operatlons will seek to promote private sector development by consolidatLng the measures under the proposed SAL and ensuring the efficient operation of the flnanclal sector, and to intensify agricultural production to improve food security, and rehabilitate the coffee sector. Sector work recently completed (e.g., an Agricultural Sector Reviow, and a Financial Sector Study) provide the analytical underpinnings for future sector operations. In addition, agreement has already been reached on a substantial program of reforms to liberalize the transport sector within the framework of the Transport Sector Credit (Cr. 2136-RW approved in May 1990). 21. In the area of capacity building, the intention is to focus primarily on the technical assietance and training needs of the macro and sectoral reform programs by: (i) reorienting the exiating technical assistance (TA) projects in the Minist-ies of Planning and Financel and (ii) introducing specific TA components in future projects in agriculture and other sectors. The Bank will also endeavor to improve project Lmplementation by devotlng more resources to project supervlison. Special emphasis ,Ill be put on improving procurement procedures to accelerate disbursements. 22. To address long-term development issues, Bank lending in the social sectors would increase. An education sector operation, which focusses on improvlng the quality and coverage of primary education in support of the Government's recent decision to reduce the primary cycle from eight to six year", was approved by the Executive Directors in April 1991. A population project will aosLst the Government in implementing its population policy objectives. A social action project to address poverty alleviation is also under preparation. Women's development will be supported through the education and health projects. The agricultural sector project will also have a direct positive impact on women, since they constitute 60 percent of agricultural labor. 23. Economlc growth in Rwanda will not be sustainable unless measures are taken to protect the fragile and deteriorating envLoinment. The Bank has helped the Government in formulating a comprehensive environmental action program. Bank assistance in this area will continue, especially in order to strengthen government Lnstitutions so that all projects in Rwanda adhere to the approved envlronmental guidelines. The A descrLptLon of the Bank's assistance to date is presented ln Annex F. proposed agricultural sector credit will include land tenure reform aimed at better management of increasingly scarce resources. 24. Economic and Sector Work (ESWI Proaram. The Bank's E8W will support the adjustment program and will, in turn, be shaped by it. Over the past few years, major studies such as a Country Economic Memorandum (CEM) (Report No. 6191-RW) and the Firat Public Expenditure Review (PER) (Report No. 7717-RW) have helped to document the caae for adjustment and to identify the range of reforms necessary in crucial areas such as the exchange rate, regulatory framework, parastatals, and public resource management. Ongoing and planned ESW focuses on deepening and extending the measures expected to be introduced in the first phase of adjustment and on preparing specific reform proposals in the areas already identified. These are the objectives of the Financial Sector Review and of a planned study of Labor Legislation aimed at reducing labor market rigidities. The Agricultural Strategy Review aims at reversing the overall economic stagnation by diversifying agricultural production, making it more export oriented. Export diversification and growth are also the focus of a planned regiona& study. A program of Public Expenditure Reviews aims to improve resource mobilization and allocation with special attention to the needs of the social sectors as well as maintenance of vital infrastructure. A planned study of Secondary and Higher Education would help to develop a policy framework for improving quality and efficiency and contribute to capacity building. work on Country Economic Memorandum (CEM) together with supervision missions of prospective adjustment operations, will monitor the progress of adjustment with a view to identifying any needed changes in policies, lending (by the Bank and other donors), and the ESW program itself. 25. Aid--Coordination and Relations with the IMF. Rwanda is one of the few African countries that had not made use of the IMF resources in the past 20 years. On April 24, 1991, however, the Executive Directors of the IMF approved a first annual arrangement under the Structural Adjustment Facility (about US$12 million). The policy agenda supported by the proposed operation has been developed in close cooperation with the INF in the context of the preparation of the PFP. As the attached matrix indicates, the Bank would rely on the IMF for the monitoring of actions dealing with the exchange rate and fiscal and monetary policies. The proposed operation has been an important vehicle for mobilizing quick- disbursing assistance to Rwanda. The Bank organized a special donors' meeting in March which was successful in confirming $110 million in disbursement of highly concessional balance of payments assistance (excluding the SAL and the IMF SAF) to close the financing gap of the adjustment program in 1991. In April 1991, donors endorsed Rwanda's eligibility under the Special program for Africa (SPA £I). The UNDP is also planning to organize a round table meeting in late 1991 and the Bank will participate in its preparation in close collaboration with the UNDP. PART II - The SAL I PROGRAM 26. By 1990, the incentive structure of the Rwandese economy had become highly distorted. In the 19809, the negative effect of price and foreign exchange controls were compounded by measures to protect domestic industry from imports made cheaper by the overvaluation of the exchange rate. This policy led to losses in economic competitiveness, the development of inefficient economic activity, and the emergence of shortages of raw materials and spare parts, which, in turn, resulted in declining output. In order to reverse this trend, there was an urgent need for reforms to foster an enabling environment to encourage the trade sector and generally improve Rwanda's international competitiveness, particularly with respect to the activities producing for export. The reforms supported by SAL I aim at dealing with these issues and are an integral part of the Government'e overall reform program outlined in the PFP. The proposed operation would support measures to: establish a competitive exchange rate and a liberal foreign exchange allocation and foreign trade regimel rationalize import tariffs; liberalize domestic trade and streamline the regulatory environment; remove production constraints in the coffee and energy sectors; improve public resource management, including the introduction of public expenditure programming and the provision of a social "safety net" consistent with a sound macroeconomic framework; and initiate reforms in the areas of taxation, labor legislation and civil service, which would be completed under subsequent adjustment operations. More specifics are provided below. A. Exchance and Trade Policy Reform Exchanae Rate Rec_me 27. aackaroun!d. Between 1980-1990, the real effective exchange rate of the Rwandese franc had appreciated _via-A-_J the currencies of its major trading partners by about 30 percent in foreign currency terms. This reduced the profitability of Rwanda's exports and also led to the imposition of strict exchange controls and quantitative barriers to imports in an attempt to protect shrinking foreign exchange reserves. over the last three years, Rwanda had to draw down about US$135 million of its foreign exchange reserves (equivalent to about four and a half months of current imports) to finance the external deficit. 28. SAL-SuAoorted Reform Prooram. The Government policy is to keep the exchange rate under regular review and to adjust the rate as necessary in the context of a tighter stance of financial policies, and in the light of the progress made toward meeting the targets for the balance of payments and foreign exchange reserves, as well as the profitability of the export sector, the number and amount of unsatisfied requests for foreign exchange, and the progress made with respect to the liberalization of the trade and exchange system. As noted earlier and as "upfront" actions for SAL I, on November 10, 1990, the Government devalued the Rwandeee franc by 40 percent in foreign currency terms yj&-A-zL, the SDR (66.7 percent in local currency). The IMF will monitor the exchange rate developments under the SAP program. Imnort Liberalization and Foreian Exchange Allocation 29. BackEound. All imports require a license from the Central Bank. Until the mid 1980s, the country had a relatively comfortable level of foreign exchange reserves and import licenses were routinely granted. With foreign exchange reserves dwindling, the Government introduced a system of administrative import allocations and established a policy of protecting the existing inefficient industry which encouraged further investments in economically non-viable activities. Through this system, the Ministry of Commerce and Consumption set import targets for all imported products with a view to controlling their quality and price, as well as reducing or eliminating imports of "unnecessary" items. Import - 10 - licenses for goods that would compete with local products were only issued to the extent that supply from domestic sources was deemed insufficient. The imports of 16 products competing with domestic production (blankets, plastic products, radios, small agricultural implements, cement, matches, and some construction materials) were prohibited. Industrial inputs and essential goods were given priority; consumer goods and luxuries were discouraged. Since mid-1990, only petroleum products and a few other essential imports have received import authorizations. 30. SAL-Sugorted Reform Program. The objective is to establish a non-discriminatory foreign exchange allocation regime through an Open General License (OGL) system administered by commercial banks. Specifically, the proposed SAL would support the following measures: (i) Elimination of all import prohibitions (except for item such as narcotics and armaments, which are normally prohibited for health or security reasons) and abolition of the current system of import programming, with the temporary exception of a limited list of commodities of wprirvry necessity', which represent about 30 percent of the value of imports (see iii below). The Government has announced publicly that this action will be effective on June 1, 1991. Whenever justified and after consultation with Bank staff, temporary import surcharges would be applied to give domestic industries time to adapt to the new economic environment. However, all such surcharges would be eliminated at the latest by end 1993. (ii) Establishment of a comprehensive OGL system before June 1992 (excluding petroleum products because of their strategic importance and the fact that they are only imported by a small number of importers). The OGL system will be funded by foreign exchange earnings, as well as by the proceeds of the SAY and the proposed Credit. Other donors will also utilize this system in their balance of payments assistance to Rwanda. Establishment of an 0OL system based on a market-clearing exchange rate would be a condition of second tranche release. The IMF would monitor any adjustment in the exchange rate that may be necessary before the OGL is established. (iii) During a transition period up to the establishment of the OGL, the discretionary elements in allocating foreign exchange for import will be progressively eliminated. On Xay 15, 1991, the Government announced the establishment of a "liberalized import regime" (LIR), which will become effective on June 24, 1991 (with the first allocation of foreign exchange of US$20 million) for about 70 percent of imports (in value terms). Under the LIR, all economic agents are eligible to submit monthly requests to the Central Bank for foreign exchange and have to pay a non- refundable fee of 5 percent on the value in local currency of licenses requested. Since the license fee paid by importers on the total amount of foreign exchange requested is non- refundable, the effective cost of foreign exchange in local currency is higher than the nominal rate, and this will discourage excessive foreign exchange requests. If the requests exceed foreign exchange availability for a given month, the allocation for each applicant is reduced proportionately (and nondiscriminately) by a factor equal to the relationship between the overall availability of foreign exchange and the total - 11 - amount reuested. In the lnitial phase of the LIR operations, a llmited Ilst of imported goods of "primary neesslty' (consisting of petroleum products, powder mllk, malt, sugar, salt, cooklag oll, pharmacoutical products, fertilizer, postlildes, and gypsum) will remaLn subject to import programing ln order to ensure an unLnterrupted supply of those goods on the domestLc market, before adequate balance of payments flnancing is available. The Government will reduce the list to petroleum products only, when programmed balance of payments support becomes effectLvely available followlng the release of the first tranche of the SAL. T"Lf UL 31. Backaround. All imports were subject to tariffs, taxes or levLes which, together, ranged from zero percent to 250 percent of the cif value. Soma import taxes were speciflc (usually based on weLght) wlth very high ad alorem equivalent. The rates were usually low for raw materials and capital goods; medium for intermediate imports; and high for non-essential consumer goods and products competing with local manufac- turers. In fact, local lndustry was protected by quantitative restrictions or prohLbitions. Tariffs were used only when imports were permitted. With the establishment of the LIR, tarlffs will become the only way of setting protection. 32. SAL-Sumnorted Reform Prooram. To correct the distortions created by the structure of tariff protection, in addition to the establishment of a LIR and the removal of import prohibitions, agreement was reached on a program of tariff rationalization. This includes moving toward a more uniform tariff structure with fewer tariff categories within a three-year period. As part of the first phase of the tariff reform, the Government has taken the following measuress (l) converting, since November 14, 1990, all tariff rates to Ad valr m, with the exception of petroleum products, beverages and cigarettes (to maintaLn the tax revenue at its current level); and (ii) introducing a minimum rate of 10 percent for all products on December 14, 1990. In addition, in June 1991, the Government willt lower the maximum tariff rate to 100 percent, and reduce the number of tariff rates to five. In cases such as luxury goods, where it is considered desirable to limit consumption (particularly during the early stage of the import liberalization process), excise taxes may be applied, but equally to imported goods and domestically produced goods--so as not to encourage the inefficient domestic production of these goods. As a gondition of second tranche release, the Government would implement the second phase of the tariff reform which would significantly lower the maximm tarlff (to about 80 percent) starting with the 1992 budget. The implementatlon of the third phase of the tariff reform (1993) would be monitored under a subsequent adjustment operation. The Government would undertake a revenue impact study before agreeing wlth the Assoclation on the actual rates to be implemented in 1992 and 1993. B. Inscentives for Private Sector Development Price Decontrol 33. Bagkoround. Until February 1991, the Government administered virtually all domestic prices through controlled prices, floor prLces, and controlled profit margins. However, this system amplified the inefficiency of Rwanda's industrial sector. Prices were fixed by - 12 - mLaLsterLal order for a group of commodities (beer, goft drinkg, clgarettes, petroleum products) and some services (medLcal fees, transport). Industrial and import priee were set on a "cost-plus* basis, with 15 percent margin on manufacturing and wholesale and 20 percent on retail trade. The Government a objective was to prevent producers and importers from making excessLve proflts and to protect consumers from the impact of increasing scarcitLes. 34. Offioial floor prices of agricultural products were, in princLple, set by the Government. They were not effectively controlled, as the marketing of agricultural products ia carried out by small traders. The agro-industrLes were, however, under the obligation to respect the floor prices, which were generally above border prices. This pollcy has hurt agro-industries ustng local raw materials (e.g., rice paddy, maize, wheat, etc.), and encouraged both smuggling of competing products and the shift to activities using imported inputs. 35. SAL-Sunorted Reform Proaram. The objective is to progressively llberalize the price system and to elimlnate all price controls. However, in exceptional cases where the sLze of the market is too small or where there are monopolies, temporary price controls would remain. Fixed prices were elimlnated in February 1991 with the exception of retail prices for petroleum products (because of their strateglc importance), minimum producer prlces for coffee, tea, wheat, rice, sugarcane, pyrethrum, as well as pharmaceutical products and publlc health service consultation rates (because of the socLal implicatLons). However, in the case of the latter goods and services the full impact of the devaluatlon wlll be passed through. Before the full lmplementatlon of import liberallzatlon, de factg monopolies (such as beer) wlll remaln subject to temporary price controls. In February 1991, the Government also elimlnated the controls on profLt margine (except ln the case of monopolies). In the case of natural monopolies (such as electriclty, water, telephone companles) the Bank has agreed with the Government on the principles of prLcLng in line with sound financLal performance and effLcLency criteria. aeoulatgry Framework 36. Backgrond. Until May 1991, to start an enterprLse ln Rwanda, an entrepreneur had to firat obtaln authorLzatLon from the Mlnistry of Commerce. The Ministry usually limlted the entry of new flrms, a declsion often rationalized by Lnvoking the small sLze of the domestic market. Once the authorization was granted, the procedures for regLstrirtion and starting of the enterprLse (involving several administrative departments) could take between six months to a year. The lnvestor still had to obtain the permission of the Mlnistry of Labor to hire or flre anyone, national or expatriate. The constraints imposed by the regulatory frameworks stLfled local competition; led to lost Lavestment opportunLties; and resulted in increased Lnvestment costs. 37. SAL-SuoPorted Reform Program. The objective is to progressively remove regulatory constralnts. As an immedlate step, the discretionary power of the Ministry of Commerce ln approvLng the establishment of prlvate buoLnesses was delegated to the local adminlstrative authorities through a mLnisterial decree. Moreover, as a conditioL.. of credlt affectLL nmus, the Government will abolish all requlrements for prlor approval of creation of private business establishments. A new lnvestment code designed to encourage private investment will be Lntroduced before - 13 - June 30, 1991. Also, the Government would formulate by January 1992 an action plan satisfactory to the Association, for the elimination of other unnecessary impediments to private sector operations This action plan would focus particularly on revLsing the legal framework ln which busLnesses operate and simplifyLng adminLstrative procedures related to enterprise creation. The objective ls tot (L) rationalize the process lnto a sangle step operationt and (ii) shorten the waiting period for approval and mLnimLze dLcretlon. The implementation of thL action plan would be monltored under a subsequent adjustment operatlon. 38. Labor mobllity was constrained by the need to prove ones resLdence in a 'commune" (the basLc administrative jurisdLction) in order to be legally employed there. The Government has already abollshed thls requirement. In addition, enterprises were requlred to hire labor only from a 1Lst established by the Minletry of Labor. A labor market study financed by IDA is scheduled to start ln June 1991 to prepare specific reform proposals regarding the revlsion of the labor code wlth a vlow to promoting employment creatlon and greater labor mobilLty. On the basli of the study's recommendations, the Government will prepare an actlon plan which, among others, will include measures to Lncrease enterprises' ability to hlre and dismiss employees. Adoption of an action plan satisfactory to the Association and abolition of the obligation for enterprises to hlre exclusively from the list prepared by the Ministry of Labor would be a conditLon of second tranche release. The implementation of the action plan will be monitored under subsequent adjustment operations. C. Sugnly-SLde Meaaures Coffee Sector 39. Backaround. In recent years, the quality of Rwandese coffee has deteriorated dramatically owing to declining soil fertility, inadequate extension services, the erosion of the price competitiveness of coffee with respect to other crops, and a producer price policy that does not diecriminate for quality. These developments have left the country ill- prepared to deal with the changing consumption patterns abroad, which are evolvlng in favor of high quality coffee. Although the prLvate sector is active in coffee marketlng, the Government has been following an increasingly "interventionist" approach in the sector. Producer prices were fixed at a level implying a substantial net subsidy to the farmers through the Coffee Stabilization Fund after allowing for the export tax on coffee. In early 1990, the Government reduced the producer prices as a means of reducing budgetary transfers in the absence of an adjustment in the exchange rate. However, the price has again been raiscd for the 1991 season. In addition, OCIR-Cafe (the coffee parastatal) has increased its interventlon by: (i) setting the price at which other companies can export coffeel (ii) increaeing its share of total coffee exports by forcing other exporters to sell to OCIR part of their milled coffee; ($ii) interfering with the timing of the sales; and, (iv) reducing competition by drastically cutting the number of traders who are authorized to buy coffee from producers. 40. SAL-Sumnorted Reform Prooram. The reform objective in the sector is to improve the efficiency of the industry and to open it up to a wider involvement of the private sector. The coffee sector reform program would be implemented in two phases. In the first phase, with the large devaluation, the transfers have been substantially reduced. However, - 14 - with world coffee prices below US$.80/per pound, the coffee sector still reqLres a small transfer. The Government is committed to eliminating transfers to the coffee sector and will review the situation towards mid- 1991, in the light of coffee export prices developments and, if needed, will take the necessary action. The Government has removed since April 1991 existing barriers to entry into coffee gathering, processLng and exporting. It has also agreed to put into place by April 1992, an export reference pricing system to provide a mechanism for securing the repatriation of export earnings and for tax assessment. The ellmination of the subsidy to the Coffee Stabilization Fund and the introduction of the pricing system reform would be conditions of second tranche srlease. in the second phase, the Government will preparo an action plan by December 1991 based on the recommendations of the Coffee Sector Study launched in June 1990. This action plan will address the following issues: (i) conversion of the current fixed producer prices into an indicative floor price system; (Li) establishment of a variable rate export tax system (where tax rates would fluctuate with world coffee prices)l (iii) liberalization of intermediary prices (transport, insurance, traders, etc.*) and (lv) redefinition of the role of OCIR-Caf6, with the objective of transforming it to a regulatory authority. In the third phase, a proposed agricultural sector operation would monitor the full implementation of this action plan and would support further actions to deepen the reforms initiated under the proposed SAL. Knerav Sector 41. Backaround. Approximately 80 percent of commercial energy used in Rwanda (petroleum and electricity) is imported, accounting for an average of 18 percent of merchandise import. during the period 1983-87. Domestic petroleum product prices during the 1980's remained well above international prices. Electricity rates, on the other hand, remained unchanged from 1981 until 1988, when they were reduced by 14 percent. Residential rates now represent 33 percent of estimated long-run marginal cost (LRMC), while industrial rates average about 40 percent of the LR1C. As a consequence, the power network is poorly maintained and operated by a Government-owned utility, ELWCTROGZ,, characterized by excessive Government intervention, weak management and a deteriorating financial situation. The Government has recognized the need to address ELECTROGAZS problems and has included the reform of BLEcTROGAZ in the ongoing IDA- supported Public Enterprise Reform Project. 42. SAL-Suctorted Reform Procram. As up-front action, the Government has increased petroleum derivative price. by 79 percent (including specific taxes). This increase provides a powerful incentive for energy conservation and helps alleviate the Government'e fiscal difficulties. with regard to electricity pricing, the objectives are to align electricity rates with their respective LRMC and to ensure the financial soundness of ELECTROGAZ. An in-depth analysis of ELICTROGAZS financial situation will be undertaken as part of the ongoing Public Enterprise Reform Project. As an interim step, the Government announced in April 1991, an increase of electricity rates by 50 percent effective June 1, 1991. As a condition of second tranche release, financial performance objectives for Blectrogaz will be defined and a calendar of rate increases in line with these objectives will be agreed upon. The Government has also begun preparation of a least-cost medium-term Power Master Plan including revised LRMC estimates. Following completion of the Power Master Plan by the end of 1992, a new tariff structure (consistent - 15 - with LRMC pricing) will be elaborated and adopted in the context of a proposed Energy Sector Operation. D. Public Resource Management 43. The recent deterioration in the country's financial situation calls for a tightening of fiscal policy. The objective set in the PFP is to reduce the overall fiscal deficit (excluding grants) from 11.7 percent of GVP in 1990 to 5.2 percent in 1993. This calls for a two-pronged approach. On the revenue side, the government has already taken a number of measures to raise money such as the introduction of a minimum 10 percent tariff on all imports (see para. 17), the increase in the tax on petroleum products and in sales taxes (see para. 17), and the introduction of an exceptional emergency "solidarity tax" on wages and salaries designed to finance the war effort. On the expenditure side, the measures include the reduction of the subsidy to the coffee sector, the reduction of the subsidy to Electrogaz (see par. 42) and a freeze on the wages and salaries. As a complement to -he financial stabilization policies to be monitored under the IMF's SAP, the reform objective under the proposed operation would be to strengthen the Government's administrative services (the Ministries of Finance and Planning in particular) with a view to better programming and monitoring of public expenditures, while setting the stage for comprehensive civil service and tax reforms. In addition, under an IDA supported project, the Government has already committed itself to a comprehensive reform of the Public Enterprise sector. Proarammino and Monitorino of Public Expenditures 44. Backaroun. In the past, the usefulness of the budget as an instrument of economic policy on Rwanda was limited, due to its partial coverage and the lack of a clear economic classification of public expenditure. The Government has decided to include projects financed by external loans and grants in the development budget, but this has not been done in a consistent fashion and the methodology has not been satisfactory; public investment programming has not been carried out within a multi-year framework, and government contributions to multi-year projects have had to be reconfirmed each year. Finally, there were no clear guidelines concerning project selection criteria. This resulted in the selection of some economically non-viable projects. There is therefore a need to control public expenditure by developing a coherent system of programming and monitoring. 45. SAL-SuDoorted Reform Prooram. As a first step, in April 1991, agreement with the Dank was reached on a revised 1991 budget, including current and capital expenditures, and on the size and the composition of the 1991-93 PIP . In reviewing the 1991 budget, particular attention was given to ensuring adequate allocation for maintenance expenditures and for a "safety net" of social expenditure (e.g., a 10 percent increase in the allocation for essential medicines). 46. As a second step, starting in October 1991, the Government will introduce a system of three-year rolling PIP with a view to integrating the selection of projects into clearly defined sectoral objectives and a comprehensive macroeconomic framework. The Government will prepare its annual investment budget in the context of the three-year rolling PIP, comprising both domestically and foreign financed investment expenditures. This document, after consultation with the World Dank, will be distributed to all multilateral and bilateral aid agencies and will serve as a basis - 16 - for the preparation of the budget. The authority of the Ministry of Planning to approve all projects to be included in the PIP has been reinforced. In case of conflict with the technical ministry regarding a particular project, the interministerial committee at the ministerial level will arbitrate. 47. The Government has agreed on project selection criteria which include: (i) economic viability (rate of return not less than 10 percent for those projects for which a rate of return can be calculated), (ii) consistency with sound sectoral and macroeconomic objectives; (iii) least- cost solution in the case of social sectors; and (iv) sustainability (feasibility of meeting local financing requirements and recurrent cost implications). The Government is preparing a manual for project selection which will be distributed in December 1991 to all ministries and to bilateral and multilateral donors interested in financing projects in Rwanda. 48. The attainment of the public expenditure management objectives would require institutional strengthening in project evaluation, expenditure programming, budget preparation and execution, as well as accounting and reporting. A medium-term work program has been established focusing on: (i) improving the project evaluation capacity in the Ministry of Planning; and (ii) strengthening the "Direction G6nerale des Investissements" in the same Ministry to enable it to follow the execution by project on a semi-annual basis. 49. The Government has also agreed to establish a three-year public expenditure program (PEP) by sector to assure consistency between the strategy and the budgetary allocation (current and capital expenditures) for each sector. It will prepare, by end 1991, PEPs for the health, education, agriculture, civil works and transport sectors which will serve as an input to the 1992 budget. In the final phase, the public expenditure programming system would be extended to all sectors starting with the 1993 budget, and its implementation would be monitored under subsequent adjustment operations. Technical assistance for the preparation of these activities would be supported under the ongoing TA Credits. 50. Agreement with the Bank on the 1992-94 PIP and the 1992 budget would be a condition of second tranche release. A round table organized by the UNDP will be held once the 1992-94 PIP review has been completed. Civil Service Reform 51. The size of the civil service is not excessive in Rwanda, but the civil service needs to be reformed (i.e remuneration policy more responsive to merit, more rational deployment among ministries...). The Government has already launched a comprehensive civil service study with UNDP assistance. The Government has agreed to prepare by January 1992, an action plan for the implementation of the civil service reform. Agreement on a civil service action plan would be a condition for second tranche releage. The implementation of the agreed measures would be monitored under subsequent adjustment operations. - 17 - TAX Reform 52. Backaround. Despite high tax rates, fiscal pressure (tax/GDP ratio of about 13 percent) in Rwanda is relatively low because of the narrow tax base and weak tax administration. The system relies heavily on foreign trade taxes (including export taxes on coffee) and few excise duties, especially on beer. Frequent exemptions from import duty and income tax under the Investment Code or other agreements further erode the tax base. Rwanda's tax system was first reviewed by the IMF in 1983 and has been updated in July 1990. The recent tax modifications (see para. 17) aim at increasing the yield and efficiency of the tax structure and moving from taxes on production and international trade toward consumption and income taxes. 53. SAL-Supported Reform Proaram. In addition to the recent increase in retail prices of petroleum products (which include specific taxes), the Government is benefitting from technical assistance from the IMF to help improve fiscal administration and design and implement a tax system that would shift taxes away from trade taxes and a few excise duties, and provide adequate private sector incentives without distorting relative prices. Under the IMF's SAF program, the Government has taken up-front measures to increase revenues by raising the sales tax rate and broadening its base, and observing a moratorium on new exemptions to be granted under the Investment Code. Taxes will continue to be levied on coffee exports, pending the recommendations of the Coffee Sector study on this issue. The Government will also prepare an action plan for implementing the remaining recommendations of the fiscal review starting with the 1992 budget. This will be monitored under the second year SAF arrangement. Public Interprise Reform 54. Backgarou. Rwanda's PR sector comprises 62 enterprises with a combined value added of about 10 percent of GDP. The performance of the sector has been ef9appointing and has resulted in a large burden on public finances. During 1983-87, net government transfers to industrial and commercial P3. (in the form of equipment and operating subsidies, non- reimbursed advances and repayment of debts) amounted to 6 percent of government revenues or about 1 percent of GDP. Since all PEs are exempt from income taxes, the PE sector also constitutes an important source of foregone income to the State. SS. The Government has started a comprehensive PE reform program designed to progressively withdraw the State from productive and commercial activities. This program is supported by an IDA-assisted PR Reform Project which was approved in March 1990. The specific objectives of the PE reform program are to: (L) reduce the role of the State; (ii) improve the institutional and legal framework for PEs; and (iii) increase the efficiency of the sector through rehabilitation of PEs that could be made economically viable, divestiture for those which can be privatized, and liquidation of the non-viable ones. A specific action plan has been agreed under the project, covering 40 public enterprises (see timetable attached to the Letter of Development Policy in pages 40 and 41) including adopting by September 1991, a general strategy for privatization and submitting new legislation governing the PH. to the National Council for Development (the Parliament) in January 1992. - 18 - S. Social and Environmental Aspects 56. Rwanda made major efforts in the 1960s and 19709 in the area of social development. However, the welfare of the Rwandese population has worsened in recent years as a result of financial constraints and demographic pressures. Per capita consumption declined by almost one- third between 1987 and 1990. The country's social indicators, which used to be above the Sub-Saharan African average, have slipped, and are now average for the continent. Food production has stagnated since the mid- 19808 and food insecurity has emerged as a serious problem. In 1989, as a result of drought, some 500,000 people were facing food shortages and lacked the necessary purchasing power to buy food in the market. In addition, the AIDS epidemic (about 18 percent of adults between the age of 15 and 45 in the capital city are seropositive) has serious economic and social consequences: the bulk of those who die are in the most productive age group. 57. Government attaches high priority to protecting the vulnerable groups during the transitional phase of the adjustment process, while enhancing the possibilities for increased incomes and continued human resource development over the medium term. The priority for improving the welfare of the poor is to restore positive per capita growth. At the same time, a combined effort to slow population growth and improve access to and the quality of social services is necessary to ensure that the poor reap the full benefits of restored growth. The Government has embarked on a major new policy to slow down population growth, and a free-standing population project with IDA support has been negotiated. In addition, the Government has, over the past few years, been conducting a major assessment of the impact of its education reform that began in the late 1970s. This has led to the Government's decision last July to reduce the duration of primary education from eight to six years; this reduction will provide about 120,000 additional places in primary schools for children of the 7-12 age group. The Government will encourage day-school for secondary classes and put more resources into primary education. Students in secondary schools and university are expected to finance a larger share of their education costs. The Government's efforts in the education sector are supported by IDA under the First Education Sector Credit which was approved in April 1991. In the health sector, the budget for medecines will increase by 10 percent in real terms from 1990 to 1991. Charges will be increased so as to cover a larger percentage of recurrent costs to help improve the quality of services. This improvement in the financial management of public health services will be implemented by end 1991. Government subsidies for the sector will target the poorest Rwandese. 58. The SAL supports the establishment of a social "safety net" within the framework of an agreed public exp4nditure program. In addition, the Government is preparing, with the help of Bank staff, a Social Action Program to help poverty alleviation by: (i) financing the parental share of education expenditures for the children of the poorest 10 percent of the population; (ii) establishing a labor-intensive program for rural road construction. and soil erosion protection; (iii) launching a development program for small entrepreneursj (iv) creating a food security program to provide food to target populations in drought-affected areasl and (v) establishing a redeployment fund for civil servants and employees of the parastatal sector. The beneficiaries of such programs would only be eligible for a limited period of time (to avoid permanent satsidies) and the Government would rely primarily on NGos to deliver - 19 - thee services. To improve the monitoring of social conditions during the adjustment period, the Government would undertake household surveys to provide information on incomes and expenditures, employment, and other socioeconomic indicators (e.g., health, malnutrition) with the help of VNDP. Finally, as noted earlier (see paras. 16, 22-23) the Government is addressing long-term development issues of population control and environmental protection and women's development through specific projects supported by IDA. PART I1. THE PROPOSED CREDIT A. Crdit Hlstgry 59. The proposed Credit would be the first SAL for Rwanda. The possibility of a SAL was first discussed with the Government in 1988. A draft PFP was prepared by the staff of the World Bank and the IMF the same year, but did not receive formal agreement of the Rwandese authorities because the Government thought, at that time, that it could manage the economLc crisis without external assistance. However, in early 1990, the authorities concluded chat there was a need for a major reorientation of the economy and requested the fank and the Fund to help them to elaborate an economic reform program. The SAL was appraised in February 1991 and negotiations were held in Washington on May 3 - 4, 1991. B. Credit Amount and Borrower 60. The Government's Structural Adjustment Program would be supported by an IDA Credit of SDR 67.5 million (US$90 million equivalent). The borrower would be the Government of Rwanda. The IMF Executive Directors have already approved the first annual arrangement under the SAF (about US$12 million). At the March 20, 1991, special donor meeting, participants confirmed indications of balance of payments support that would generate disbursements of about $110 million in 1991 (see para. 25). C. Manaaement and Monitorina of the Prooram 61. To monitor program implementation, the Government would establish an interministerial committee with representatives from the Ministries of Finance, Planning, Commerce, and the Central Bank, under the overall responsibility of the Minister at the Presidency. This interministerial committee will be supported at the technical level by the working group which was responsible for the dialogue with the Bank during the preparation of the proposed Credit and which will be enlarged to include a representative of the Ministry of Commerce. Since this is the first policy-based operation in Rwanda, frequent contacts with the authorities through the Resident Mission staff and frequent supervision missions will be needed to facilitate continuous monitoring of the program's progress. The IMF will monitor actions in exchange rate, fiscal and monetary policy areas under the SAF. D. Disbursements and Procurement 62. The proposed Credit would be disbursed in two tranches, the first becoming available upon effectiveness (around July 1991) and the second tranche about nine months thereafter. Given the urgent need for balance of payments assistance to support the initial phase of the liberalization process and in view of the substantial up-front actions - 20 - included Ln the program, the first tranche would be Sof 41.3 mllion (US55S million equivalent). For the same reasons, up to SOR 13.5 million (US$18 million equivalent, i.e., 20 percent of the total amount of the Credit) would be made available to finance retroactively the costs of imports incurred not earlier than four months before the approval of the proposed credit. 63. The proposed Credit would finance 100 percent of the cif costs of eligible imports, excluding gold, jewelry, pearls, nuclear reactors and radio-active materials, tobacco and alcoholic beverages, defense items and goods intended for milLtary use. Imports of food and petroleum products will be limited to US$13.5 million. Direct imports by the Government and public and private entities will be procured according to international competitive bidding procedures for goods estimated to cost the equivalent of US$2 million or more per contract. Goods imported by Government and public entities estimated to cost les than US$2 million would be procured through Rwandese public procurement procedures but in any case on the basis of evaluation and comparison obtained from more than one supplier, eligible under IDA guidelines. Imports by the private dector for contracts estimated to cost less than US$2 million would be in accordance with normal commercial practices in Rwanda, which are acceptable to IDA. Whenever possible, quotations from eligible suppliers from more than one country would be sought. The Government has already engaged the Soci6t6 Gen6rale de Surveillance (SGB) for preshipment import verification services, and all imports financed under the Credit would be inspected by SGS. 64. The Government will establish a Special Account in the Central Bank, on terms and conditions acceptable to IDA, to facilitate disbursement. Upon Credit effectiveness, IDA would make an initial disbursement of US$1S million into the account. The account would be replenished regularly and up to the limit of the first tranche on the basis of: (i) fully documented reimbursoment applications for import contracts exceeding US$S50,000 and (ii) statemen's of expenditure (SONS) for import items between US$2,000 and US$50,000. The Government will entrust the National Bank of Rwanda with the responsibility for preparation of withdrawal applications under the Credit and for collection of documents to be furnished to the Association in support of such applications. These records and accounts, including those for Sose, will be maintained and audited each fiscal year by independent auditors acceptable to IDA# the audit report will be provided to the Association not later than four months after the end of each fiscal year. All documents and supporting expenses incurred by using SOs will be kept and made available to IDA supervision missions for review. E. Monitorable Actions 65. In designing the operation, maximum effort has been made to front-load most of the key actions, while initiating the preparation of further reforms that would be implemented later in the period covered under the SAL as well as in subsequent adjustment operations. Specific actions to be taken by the Government under the proposed SAL are detailed in the Government's Letter of Development Policy (LDP) (see Annex B). Tranche release will depend upon satisfactory review of overall performance under the adjustment program, including maintenance of an appropriate macroeconomic framework and upon the completion of a specified list of core actions. The LDP forms the basis for the performance review. - 21 - 66. The following actions have already been taken by the Government undet the proposed program. - adjustment ln the exchange rate} - establishment of the LIR for 70 percent of imports; - agreement on the 1991-93 PIP and the 1991 Budget; - implementatLon of the fLrat phase of tarlff reform; - Lnterest rate liberalLzatLon; - abolition of import prohibitions for protectLve purpose. and the system of import prograumLng, except for a limited list of commodities of primary necessity which represent 30 percent of the value of imports; - elimination of controls on profit margins and of fixed prLces except on selected goods and services; - increase in petroleum product prioes by 79 percent on average. 67. The first tranche will be released after elimination of the legislation requiring the Government to approve the creatlon of private business establLshments. 68. The second tranche release wlll be conditional on the Government imple_mnting the following actions in a manner satisfactory to the AsseciatLont - it has *stablished a non-discriminatory foreign exchange allocation regime based on an open general licensang system (para. 30); - It has implemented the second phase of the tariff reform (para. 32); - It has adopted a three-year rolling publlc Lnvestment program for 1992-94 and a budget for 1992 (para. 52); - It has, ln respect of its coffee sector: (a) put into place an export reference prieing system that provides a mechanLem for securing the repatriation of export earnings; and (b) eliminated all subsidies to the Coffee StabLilzation Fund (para. 40); - It has adopted an action plan to reform the regulation of the labor market (para. 38)t - It has finalized an action plan for civil service reform (para. 51). - It has defined financial performance objectives for Ilectrogas and agreed on a calendar of rate increase ln line with these objectives (para. 42). - 22 - P. Benefits and Risks 69. The measures supported by the proposed SAL (together with the 11's SAF program) are expected to contribute to the restoration of internal and external equilibria, as well as to create the conditLong for sustained economic growth. In the Immediate future, keeping the country on the adjustment path will be the main priority. While the Government has already demonstrated its commitment to reform, there are a number of risks which may force it to deviate from the adjustment path. 70. The first major risk is the resumption of ethnic violence which could derail the adjustment program. Although a cease-fire agreement has been signed on March 29, 1991 between the Government and the rebels, there is always a risk of other outbursts until a durable solution is negotiated with the ethnic minority refugees in neighboring countries. The national Government's reconciliation policy and some of the recent political reforms (move towards multi-party system) announced by the President should contribute to the restoration of peace and stability. A decisive step is the recent liberation of some 8000 political prisoners and the creation of a cease-fire monitoring group. in the long term, equitable economic growth would be the best insurance against social and economic instability. The adjustment process is necessary to establish the preconditions for the resumption of growth. 71. A second major risk is the Government's continued commitment to reform. On October 1, 1990 the President of Rwanda personally confirmed to Senior Bank Management the Government's commitment to the adjustment program. Moreover, his Government took courageous "upfront" policy measures in October/November 1990 which underscores the seriousness of its commitment to the program. However, vested interest groups (e.g., civil servants who wile. experience a decrease in their purchasing power, and industrialists who currently benefit from protection) may attempt to slow down the adjustment process. At the same time, lack of foreign exchange is putting considerable pressure on economic activities, in the form of growing scarcities, company closures, and factory operations well below full capacity. This risk is mitigated by a growing realization among the key pressure groups that urgent implementation of the proposed reforms is needed to avert a serious economic crisis which could affect the social and political stability of the country. The politically most difficult key measures have already been implemented up-front. Moreover, the front- loading of measures and the relatively rapid schedule of trade liberalization proposed under the SAL are likely to result in less adjustment fatigue, and should yield quicker growth dividends after a relatively short stabilization period. 72. The third risk is related to slow internalization of the reform program. The long period of dialogue with authorities on the adjustment program (neaTly four years) has been conducive to full internalization of the reform objectives at the higher levels of administration. However, the domestic information network in Rwanda has been consistently biased against adjustment programs which advocate a less regulated and more open economy. There is, therefore, a genuine need to stimulate discussions and disseminate adequate information among the population at large on market- oriented reform programs. This process has already started with the dissemination and discussion of the Long-Term Perspectives Study on Africa. It will be intensified by visits by the ministers and/or high ranking officials to tour all ten prefectures in the country in order to explain the rationale of policy reform. The Resident Mission will continue - 23 - its consensus-building effort throughout the period of program implementation. It will organize seminars and workshops on adjustment related issues. 73. The fourth risk is the relatively weak institutional implementation capacity of the Rwandese administration. It should be noted in this connection that some features of the program are intended to reduce the burden on the administration. It is, for example, administratively far more difficult to implement the current system of controls (such as import programming of about 1,700 commodities, control of profit margin of almost all commodities, etc.) than the system that is proposed under the SAL. There are, however, certain key areas such as tariff reform and public expenditure programming in which the Government will need technical asaistance. Some technical assistance may also be needed to improve the Government s policy analysis and program preparation capacity in the social sectors. To ensure timely availability of institutional support, the existing IDA-supported technical assistance projects in the Ministries of Plan and Finance will be reoriented towards the needs of the adjustment program. In addition, UNDP funds under the Technical Assistance for Adjustment Facility would provide an adequate coverage for the institutional support needs of the program. 74. Finally, there is the risk of possible delays in mobilizing adequate external assistance. The orderly implementation of the adjustment program is critically dependent on the timely disbursement of projected balance of payments assistance. This risk has been minimized by obtaining firm assurances from the key donors under SPA II on the magnitude and timing of their assistance. PART IV - RECOMMENDATION 75. I am satisfied that the proposed IDA Credit would comply with the Articles of Agreement of the Association. I recommend that the Executive Directors approve the proposed development Credit. Barber S. Conable President Attachment Washington, D.C. May 29, 1991 - 24 - Key Processina Event STRUCTURAL ADJUSTMENT OAN X a) Time taken to prepare program: One year b) Program prepared bys Ministry of FLnance/Ministry of Planning C) First IDA mission: April 1990 di Departure of Appraisal Missions January 1991 e) Negotiations completeds May 1991 f) Planned date of effectiveness: July 1991 - 25 - ANNEX A LETTER OF DEVELOPMENT POLICY FROM THE GOVERNMENT OF RWANDA (Unofficial Translation from Original French Document) I. INTRODUCTION 1. In the 1960s and 1970s, the Government's efficient management of resources, coupled with a sustained growth in agricultural production led to a continuous growth of per capita income and a relatively low level of indebtedness. However, during the 19809 Rwanda's economy experienced significant external shocks which had a marked impact on its performance. The collapse in coffee prices on the international markets led to a decline of more than 40% in Rwanda's export receipts. Over the last four years these shocks compelled the Government to adopt foreign exchange rationing along with restrictive budgetary policy measures. The significant disequilibrium in the balance of payments resulting from the repeated falls in coffee prices over the period 1987-90 was essentially financed by drawing down foreign exchange reserves, which were completely exhausted at the end of 1990. At the same time agricultural production is facing serious difficulties due to unfavorable climatic conditions. For these reasons, the Government of Rwanda has decided to embark on a structural adjustment program. 2. By the end of September 1990, an agreement had been reached between the Rwandese authorities and the Bretton Woods Institutions on an economic and financial policy framework paper (PFP). Few days later, Rwanda was attacked by armed elements entering from a neighboring country. The Rwandese army quickly regained control of the situation, while the Government made every diplomatic effort to reach a peaceful end to the conflict. A conference of Heads of State of the region, attended by representatives from the OAU and the United Nations High Commission for Refugees, was held on the 19th of February 1991 in Dar- es-Salam. The conference adopted resolutions which could lead to a final solution to the refugee problem alleged by the aggressors to be the reason for the attack. A cease-fire was signed on the 29th of March 1991 in N'sele, Zaire, between the Rwandese Government and the aggressors. 3. Despite these events, Rwanda has confirmed its determination to pursue an economic adjustment program by implementing all the up- front measures which had been agreed with the World Bank and international Monetary Fund in September 1990. 4. Rwanda requests financial assistance from the international community to support its structural adjustment program. Specifically, the Rwandese Government is asking the International Development Association (IDA) for a Structural Adjustment Credit. The main economic and social objectives of the adjustment program are set out in the Policy Framework Paper (PFP), which was discussed by the Executive Directors of the World Bank and the IMF in April 1991. This letter of economic development policy reviews the recent economic developments, recapitulates the principal objectives set out in the Policy Framework Paper and identifies some of the reforms the Government has decided to implement over the next two years. - 26 - ANNESX B II. THE ECONOMIC SITUATION 5. The 1970s were for Rwanda a period of sustained economic growth, averaging 4% a year, and of relative financial stability with a low rate of inflation. However, at the beginning of the 1980s, significant deterioration in the terms of trade along with insufficient corrective policies, led to serious imbalances in the economy. The Government did not believe that the coffee boom of the late 1970e was only temporary and allowed public expenditure, and the wage bill, in particular, to rise substantially. Beginning in 1983 and in order to deal with the worsening situation, the Government cut public expenditure and imposed much tighter restrictions on access to foreign exchange. 6. Since 1987, Rwanda has faced a steep decline in world coffee prices and difficult climatic conditions. Agricultural production declined by about 14% between 1987 and 1989 and the restrictions on imports imposed by the lack of foreign exchange led to a slowdown in almost all economic activities. GDP fell by 0.5% a year on average between 1985 and 1990. The rate of inflation, measured by the official price index, remained low mainly because of the overvaluation of the national currency. 7. Since 1985 as a result of the fall in export earnings, the balance of payments has deteriorated. Despite the measures taken to curb imports, the current deficit (excluding official transfers) fluctuated between 10% and 12% of GDP (10.4% in 1990). The decline in exports performance cannot be exaplained solely by the fall in coffee prices; volume of coffee exports has been declining as well; other exports have performed poorly because of the overvalued exchange rate, low productivity and a regulatory framework not conducive to export development. The external deficit was financed by large amounts of assistance from the international community, mainly in the form of grants (which explains the relatively low level of external indebtedness), and by depleting the foreign exchange reserves, which fell from around five months of imports in 1987 to near zero at the end of 1990. 8. Regarding public finance, it has not been possible to reduce the deficit despite the Government's efforts to contain the operating costs of its administration. Increases in wages have been held to 3% a year and the budgetary allocation for the purchase of goods and services has been cut. However, the policy of maintaining high producer prices for coffee had a serious impact on the budget. Between 1987 and 1990, transfers to the coffee stabilization fund amounted to some 1.5% of GDP and 6.8% of total public expenditure. over the period 1985-1990, the budget deficit (excluding grants) increased from 6.5% to 11.7% of GDP (including grants, it increased from 3.7% to 8.4%). III. OBJECTIVES OF THE STRUCTURAL ADJUSTMENT PROGRAM 9. To adress the severe crisis affecting the Rwandese economy, the Government has decided to modify the macroeconomic policy pursued in the past in order to promote much greater participation by the private sector in national development, and to encourage exports. The objective - 27 - ANNMl II is to establish a solid ground for increasing real per capita income and improving the living standards of the population, while maintaining domestic price stability and a sustainable budgetary and balance of payments situation. 10. The adopted development strategy aims at reversing the economic decline of recent years in order to restore the growth rate to about 4% and to limit inflation to 5 annually by 1993. The assets that will enable Rwanda to meet its challenges are the skills of its farmers, the fertility of its soil, the quality of its public administration and the Government's determination to implement the reform program. Starting from 1992, improved yields for foodcrops and traditional export crops should enable agricultural sector production to grow at 3.6% a year. The implementation of the private sector incentives should lead to an average annual growth of 4.5% in the industrial sector and the recovery of services should benefit from the new exchange rate policy. The growth in per capita income should result in savings increasing over the period to 8% of GOP. 11. Regarding public finance, the Government'e objective is to reduce the overall fiscal deficit, excluding grants, from 11.7% of GDP in 1990 to 5.2% in 1993. The targets for 1991 and 1992 are 9.3% and 6.6% respectively. This improvement requires the introduction of austerity measures as part of prudent and rational management. The strategy for reducing the deficit requires a two-pronged action: increasing tax receipts and improving the management of public enterprises to increase revenuees and reducing direct and indirect subsidies, eliminating transfers to the coffee stabilization fund, gradually reducing additional military expenditures resulting from hostilities, and controlling the growth of the wage bill to constrain expenditures. 12. To improve the foreign trade situation, the Rwandese franc was devalued. This will not necessarily lead to a corresponding improvement in the current account balance, as imports would have to increase over the period to restore economic growth, while the exports will take time to yield results. Therefore, the current account deficit would increase to 15.2% of GDP in 1991, gradually falling thereafter to 12.4% in 1992 and 11.4% in 1993. 13. To attain the objectives of this adjustment program, the Government has launched a series of reforms that are intended to: (i) improve the competitiveness of the Rwandese economy; (il) encourage private sector activities; (iii) eliminate production constraints in key productive sectors; (iv) improve public resources management; and (v) provide a "social safety net" within a public expenditure program consistent with the macroeconomic framework, in order to protect the poorest and most vulnerable groups in the population. 14. In addition to measures already implemented and to those which will be implemented in the short run, this program contains actions that will help to identify and develop further reforms to be implemented gradually over the following years. - 28 - IV. STRUCTURAL ADJUt PROGRUI STRATUGY AND M3A3U A. Mroving the QMMet-tvnsess of thk RwSanee Rconcmy nho xchanae Rate 15. The Government recognizes the need to adjust the exchange rate to restore the competitiveness of Rwandese products and bring the supply and deomand for foreign exchange into equilibrium. Therefore the Government declded on November 9, 1990 to devalue the Rwandese franc vis-a-vis the SDR by 66.7% in local currency (40% in foreign currencies). The exchange rate policy will be reviewed whenever necessary in light of the balance of payments situation and the progres made in the pace of import liberalization, in order to reach a market determined exchange rate. XmuortsaRecimn 16. The objective is to replace the current system of import programming by an Open General Licensing system (OGL),(with the exception of petroleum products due to their strategic importance) at the latest in June 1992, or earlier if existing financial resources are sufficient to ensure the equilibrium of supply and demand of foreign currencies. In the interim a liberalized import regime (LIR) is being adopted. During this period, the import programming system will be retained only for a limited list of commodities of "primary necessity" which represents about 30% of the value of imports. This list was prepared in consultation with the World Dank and the IMF. As soon as the first tranche of the IDA credit supporting the program has baen released, the list will be reduced to petroleum products. If existing financial resources are insufficient, the Association and the Government will agree on a time-table for a progressive reduction of this list. 17. This temporary system includes a mechanism to evaluate the excess demand for foreign exchange relative to its supply. Bach month, the National Bank of Rwanda will announce the amount of foreign exchange available and importers will be invited to apply for allocation. A non- refundable fee of 5% on the value of import licenses, requested in local currency, will be paid for all categories of imports throughout the duration of the LIR. Applications for import licenses will be transmitted to the National Bank of Rwanda by commercial banks after the Ministry of Commerce makes sure that the commission of 5t has been received. If the requests exceed foreign exchange availability, the National Bank of Rwanda will reduce proportionately the amount of foreign exchange provided to each importer. The importers will have six months to accumulate foreign exchange and use it. To ensure transparency in these operations, the list of applications made and allocations received by each importer will be published every month. Tariff Recime 18. To rationalize the allocation of national resources and stimulate the competitiveness of the Rwandese industries, the Government is revising the customs tariff. The objective of this reform ia not to increase customs receipts but to reduce current disparities in the level of effective protection of various economic activities. For this reason, a minimum rate of 10% has been in effect for all products since - 29 - mXU. December 1990. The number of rates will also be reduced and the maximum rate will decline from 220% to 100% in 1991, and will be significantly lowered again in 1992 and 1993. Furthermore, all rates will be ad walorem except for certain specific products, a list of which has been prepared in conjunctLon with the World Bank. To ensure that these ref*rms are implemented satisfactorily, the Government has established a special comission. The first round of the reform will be effective by June 30, 1991 at the latest. 19. Over the past decades, imports of some products were prohibited or subject to quotas to protect local industries from foreign competition. In line with the new liberalization policy, it has been decided to elLminate these prohibitions and quotas by June 1, 1991 except in the case of dumping, and replace them with a temporary surcharge which will be eliminated in 1993 at the latest. The recent foreign trade law, promulgated in December 23, 1989, will be revised before June 30, 1991 to remove all stipulations contrary to the liberalization policy. Financlal gector 20. The reforms proposed in the real sector of the economy have to be complemented by a consistent monetary policy and a flexible and efficient financial system. The Government initiated this process in 1990 by eliminating the preferential credit system and subsidized interest rates for the so-called priority sectors. At the same time, interest rates wers significantly increased in order to stimulate domestic savings. 21. To encourage competition in the financial sector, the Government intends to gradually reduce the imposition of individual credit ceilings or to minimize their negative effects. In the future, the interbank market wlll be developed and a mandatory reserves system will be gradually introduced. In addition, to stimulate banking activity, the Government will examine the possibilities of giving bank. tax relief on the amounts set aside as provisions. Finally, a significant effort is required in the training of personnel, both in the National Bank and in other financial institutions. B. Incentives for Private Sector Develooment Pricing Policy 22. To improve economic efficiency, the Government has decided to rely on market forces so as to ensure effective resource allocation and to motivate the private sector. On November 9, 1990 all controls over profit margins were removed, except for monopolies. For natural monopolies (utilities), prices will be fixed according to the principles of sound financial management. Prices fixed administratively were also deregulated on November 9, 1990, except for a limited number of goods and services agreed with the World Bank and IMF (retail prices for petroleum products, minimum producer prices for coffee, tea, wheat, rice, sugarcane and pyrethrum. as well as pharmaceutical products and public health service consultation rates). The decision to deregulate prices has been officialized by a asries of ministerial decrees. The full impact of the exchange rate adjustment will be passed on in the case of goods and services whose new prices will remain temporarily fixed. This measure came into effect on November 13, 1990 for petroleum - 30 - MM a products and on January 20, 1991 for public transportation. Zlectricity and water tariffs are being raised by 50%, effective June 1, 1991. Institutimnal-Framework for the Private Sector 23. The Government has decided to redefine the legal and institutional framework for the private sector and to sLmplify administrative procedures in order to facilitate the process of starting a new business and increase private sector participation in production, trade and job creation. All the basic documents in the cowmercial code will be revised to adapt them to the new economic environment, and legislation will be amended to simplify administrative procedures and harmonize them with the revised code. Before January 1, 1992 an action plan will be prepared to eliminate the principal obstacles to the smooth operation of the private sector and define the various phases of the revision of the commercial code. To facilitate the settlement of business disputes among economic operators, it is planned to set up commercial tribunals and establish a corps of appointed officials for the notification and execution of commercial proceedings. 24. To encourage investment in the private sector, the Government has decided to simplify the Investment Code so as to make it easier to administer and to adapt it to the needs of the current situation. The new Investment Code, after review in conjunction with the World Bank, will be prouulgated before June 30, 1991. Labor xazke 25. The Government's objective for the labor market is to promote mobility and employment. A study financed by a Special Project Preparation Facility from IDA will be undertaken to analyze the various features of the labor market in Rwanda and identify necessary reforms in labor legislation. Baed on the results of this study, an action plan to amend the labor legislation will be prepared and discussed with the World Bank before being implemented by mid-1992 at the latest. This action plan will include a measure authorizing enterprises to hire without going through the Ministry of Labor. 26. To encourage the establishment of new industrial and commercial activities, the Gov.rnment is examining the possibility of reducing the administrative steps required for the establishment of private business. In the meantime, relevant legislation will ke amended to abolish the requirement for prior authorization for establishing a business, currently obtainable from the Ministry of Commerce and Consumption. C. Su=Dly Side Measures 27. Given the decline in GDP over the past five years, the success of Rwanda's structural adjustment program requires implementing a strategy to stimulate production wherever there is a potential. This strategy must explore all opportunities which may lead to an increase in export receipts so that Rwanda will reduce its heavy dependance on foreign assistance. In addition to the exchange rate management, policy oriented toward promoting exports and developing tourism, the strategies actually followed in key sectors of the economy must be reassessed with the aims of enhancing management to achieve increased efficiency and taking advantage of all opportunities offered by the external market of - 31 - ANNB B an open economy. From this standpoint, the agriculture, mining, energy, transportation, international trade and tourism sectors will receive special attention. Agricultural Sector 28. The trend in food availability in Rwanda during the 1980's indicates that the current sectoral atrategy cannot ensure food security for the population. Rwanda is now at a cross-roads where some important decisions regarding agricultural planning have to be taken. The national commission for agriculture and the experts of the World Bank agree that to reach food security the agricultural sector has to shift from subsistence production and become market-oriented. This leads to important implications for planning of activities in the agricultural sector including, in particular, the choice of crops which can be economically promoted. 29. A significant part of the new agricultural strategy has already been prepared. The Government still has to define its sectoral priorities, to assess the long-term impact of the new strategy on the population's food security and to determine the investments to be made. This work will be completed by mid-1992 at the latest. The new market oriented agriculture and strategy will consider export-oriented production as well as import substituting production. This strategy Is consistent with the overall strategy of reducing the external deficit and is part of the adjustment program. In the next paragraphs, and as part of the adjustment of the agricultural sector, we present our short- to-medium-term strategy in the following sub-sectors: Cof fee 30. In light of recent developments on world coffee markets and the medium and long-term outlook, the Government is planning to reconsider the policies followed so far in the sector in order to adapt them to the new market environment. The study which began for this purpose in June 1990 will be completed by September 1991. It will among other things indicate ways to improve the quality of Rwandese coffee and liberalize the sector so as to stimulate producers and thereby raise output. Based on the results of this study, an action plan will be prepared and discussed with the World Bank before December 1991. 31. In the meantime, the Government has deregulated the collection, processing and exporting of coffoe as of the beginning of the 1991-1992 season. A system of export reference price determined via consultation by a committee of representatives of all exporters and OCIR-Caf6 will be introduced before the beginning of the 1992-1993 season. Given the difficult domestic financial situation, the Government will take all appropriate steps to eliminate in 1991 any remaining subsidy to the Coffee Stabilization Fund. 32. To reduce the dominant role of coffee in Rwanda's exports, the export development strategy places special emphasis on increasing tea production in the short and medium terms. A study of the sector will be undertaken in order to carefully examines (i) the possibility of expanding tea cultivation in the form of industrial plantations and small-scale operations by independent farmers, (ii) the most effective - 32 - ANN _ means of supplying and applying fertilizers and other inputs and (iii) a formula for determining producer prices that reflects world prices. The study will also evaluate the marketing system and consider the possibility of reorganizing production units in order to guarantee greater financial and management autonomy. The possibility of greater private sector participation will also be examined. New Acricultural Exports and Substitutes to Imnorts 33. The macroeconomic and institutional reforms of the structural adjustment program, will have a positive impact on the profitability of activities aimed at export diversification (vegetablee, fruits, flowers, decorative plants,...) and import substitution (sugar, wheat, rice,...). The new agricultural strategy will emphasize the development of these activities. In particular, it will seek to develop a strategy of expanding production in sectors where import substitution is profitable and to develop a strategy of expanding production in sectors where export is profitable. The terms of reference of these studies will be finalized and discussed with the World Bank before the end of June 1991. The studies will start in January 1992 at the latest. Minina Sector 34. Mining exports, which accounted for 10% to 15% of total exports up to 1985, had practically disappeared by 1987. However, mining activity resumed in 1989. The exchange rate adjustment of last November should have restored the profitability of this sector. Efforts will now be focused on improving the management of the two new units the Small Miners Cooperative (COPIMAR) and the State Mining Corporation (REDEMI) in order to take full advantage of the new incentives framework. The first phase is to evaluate, between now and the end of June 1991, the performance of these two enterprises. A five-year workplan for COPIMAR and REDEMI will be subsequently prepared in consultation with the World Dank before December 1991. The possibility of greater private sector participation will also be considered. Eneray 35. In the energy sector, we will seriously consider policies to reduce energy costs and rationalize the management in the sector as a whole. Our objective is to encourage energy conservation and minimize the budgetary impact of the present sizable subsidies to the hydroelectricity sector. 36. In this context, the exploitation of methane gas from Lake Kivu is a high priority for the Rwandese Government, since in the past the substitution of this gas for imported fuels did yield high returns in a number of areas. Furthermore, its impact on the environment will be positive because it is a good substitute for wood which is currently the main fuel utilized in many industries, tea in particular. A master plan is in preparation for electricity production. It will define optimal choices in the area of production and should be completed by mid-1992. On the demand side, the Government has, since November 13, 1990, passed on the full effect of the exchange rate adjustment on the new prices of petroleum products in order to curb demand and also increase the budgetary contribution of the taxes levied on these products. - 33 - ANEX 37. The Government will raise electricity tariffs in order to bring them in line with the long-term marginal cost of electricity. In the short term, it was decided on April 26, 1991 to raise the tariff by S0% starting from June 1, 1991. 38. Finally, one of the Government's priorities is the preparation of a performance contract in order to improve the management of ELMCTROGAZ. This contract is to be completed and discussed with the World Bank by the end of 1991. Transgprtation Sector 39. The Government's objectives are to improve Rwanda's internal and external communications, reduce transportation costs and improve management in order to increase returns. 40. To achieve the above-mentioned objectives will require not only additional investments in the transportation sector but also the Introduction of greater competition. To this end, existing regulations must be revised to remove existing barriers to entry into the sector. The new regulations will come into effect by mid-1991 at the latest. In addition, all restrictions regarding the free choice of mode of transportation for imports and exports have been eliminated. 41. The pricing policy in transportation is being liberalized. The prices of international transportation, the prices of internal transportation of goods and private passenger transportation were deregulated in December 1990. The fares paid in public passenger transportation were increased 20% in January 1991 to reflect the impact of structural adjustment measures, particularly the exchange rate devaluation and the increase in fuel prices. 42. The operating conditions of public enterprises such as ONATRACON, STIR and AIR RWANDA will be reviewed as part of the Public _nterprises Rehabilitation and Restructuring project supported by IDA. A performance contract with ONATRACOM is under study and is to be adopted before the end of 1991. Financial and management audits of STIR are ongoing and will provide the basic data to enable the partial privatization of this enterprise. This privatization plan is to be completed not later than the end of 1991. In addition, since a recent study of increased air access to the country pointed to the need to a dependable national carrier, an in-depth reorganization of Air Rwanda will take place before end 1992. Exnooxt Promotion 43. The Rwandese Government considers that disequilibrium between import and export constitutes a major constraint to its development policy, especially since its exports are extremely dependent on coffee. The export promotion and diversification strategy will be intensified during the program period. The devaluation which improved the competitiveness of Rwandese products on the world market constitutes a major stop forward. Furthermore, to reach its objectives, the Government has adopted a three pronged program: the improvement of the regulatory and the institutional framework; the expansion of production and marketing of goods and services for exports; the support of private entrepreneurehip and training programs to increase the quality of labor. - 34 - am L B 44. Regarding the regulatory and institutional framework, the objective is to facilitate export activities by introducing appropriate incentives. 45. The expansion of production and marketing of products and services for export forms rart of products/market specific strategies which will be defined and implemented. These strategies will define for each exportable product the ways and means to expand production and how to export them to specific markets. 46. These measures will be complemented by actions to promote the emergence of a class of competent entrepreneurs in the productive and services sectors (banks, transit, transportation, insurance, information,...). This target can be reached under the following conditions% - getting a complete set of data; - providing appropriate training; - technical assistance on management and organization of enterprises and on how to explore new markets; - technical assistance on defining quality standards and implementing quality control. A coherent strategy is being prepared by the Government and will be presented for discussion to the World Bank before the end of 1991. Promotion of Tourism 47. Rwanda should be an ideal place for tourism due to its pleasant climate, its beautiful landscape, its exotic plants and animals, its modern hotels and its relatively developed communication systems. The development of this sector requires the implementation before the end of 1991 of the master plan which has just been completed. The first step will be the full capacity utilization of existing infrastructure and negotiating with neighboring countries so as to ease movement of visitors. The Government should encourage the population to preserve the nature and its resources. 48. To improve the profitability of existing infrastructure, the Office Tourism and National Parks should be restructured. The Governm..Lt has decided to gradually withdraw from the management of the hotels it owns and to concentrate on promoting tourism. The hotel privatization strategy will be approved by Nay 31, 1992. Regarding tourism activities and national parks, a performance contract will be signed between the State and the Office before September 30, 1992. 49. The Government intends to preserve the natural forests, protect the national parks and prepare in the medium term new facilities for tourigm. The animals of these parks and forests should be protected to preserve the natural environment but also for touristic and scientific purposes. D. Imnrovina Public Resource Manacement 50. The structural adjustment program adopted by Rwanda is intended among other things to reduce the budget deficit, which has now reached unsustainable levels. This objective will be achieved through tighter expenditure control. However, priority programs in the social - 35- AMNEX_ sectors and the maintenance of national infrastructure should recelve adequate financing. To this end, the Government is in the process of introducing resource allocation procedures based on a three-year public expenditure program and a three-year rolling public investment program. These programs will serve as a basis for the preparation of the annual budget. Ubg XnveLstmnt Proaram (-IP&R S1. Considerable progress was made in 1990 in the preparation of a PIP. The programming of public investments is hampered, however, by the lack of long-term sectoral strategies in the main sectors. Some of the projects presented to donors for financing, therefore, are not always part of clear sectoral strategies. 52. To remedy this situation, long-term strategies for key sectors of national development must be rapidly prepared in order to make sure that now projects are consistent with the sector strategy. In addition, it is important to adopt a nationwide guide defining the selection criteria for public investment projects and the guidelines to be followed by the Government and donors in selecting projects for inclusion in the PIP. This guide will set out the institutional techniques and procedures which will be the basis for the planning, analysis, negotiation and programming of development projects in the PIP. It will be prepared in consultation with the World Bank by the end of December 1991. 53. Each year the technical ministries, in collaboration with the various donors, will project disbursements for each project over the next three years; these will be revised every six months to reflect the actual pace of implementation. The Ministry of Planning will consolidate these projections and adjust them after a critical examination of each indivldual project which takes into account the nature of the project, the past performarce in project implementation and absorptive capacity. It will also make sure that the overall investment is compatible with the macroeconomic framework. Bach year, the Government will discuss with the World Bank the draft three-year rolling PIP before October 30, with the program for the period 1992-94 starting on October 30, 1991. S4. The Government has agreed with the World Bank to adjust the 1991-93 three-year PIP to the level indicated In the macroeconomic framework. A donor's Round Table will be organized by UNDP and the Government in December 1991 to discuss the financing of the 1992-94 PIP. QPntrol of Public NxDenditure 55. In order to control public expenditure and to ensure a satisfactory allocation of resources between investment expenditure and recurrent costs, the Government will establish three-year sectoral public expenditure programs (PEP) reflecting the sectoral strategies. The PEP, the PIP and the budget will be entirely consistent with each other. The PEP will be prepared in 1991 in consultation with the World Bank for the agriculture, health, education, transportation and public works sectors and incorporated into the 1992 budget. This procedure will be extended to all other sectors for the preparation of the 1993 budget. - 36 - AMM8 Fiscal Reform 56. The Government rocognlieo the need to ratLonalize and Improve the offLeLency of the tax system so as to stLmulate further economLc growth. For this reason, taxes on forelgn trade and productlon wlll be gradually replaced by taxes on consumptlon and income. Some of the reCommendatlons derivlng from studies undertaken by the IMF ln 1983 and 1990 have already been applied and the Government has requested further technLcal assistance from the IMF to prepare in-depth reforms of Rwanda's tax system. Thle plan will be gradually introduced startlng with the 1992 budget. Publle Rnterariseg 57. The Policy Framework Paper (1991-93) reaffirms the LntentLon of the Rwandese Government to deal with the public enterprises. IDA has declded to support its efforts wlth a credit for the rehabilltation and restructurlng of public enterprlses. The main objectlves of thLi reform are to: (i) reduce the role of the State in thls sector; (iL) improve the legal and institutional framework for the public enterprLses; and (LL1) Lncrease sector efficLency by rehabllitating enterprlses that can be made economically viable, divestLture for those that can be privatized, and liquidation of the non-vlable ones. A general strategy for prlvatization will be adopted before September 30, 1991 and a new legLslation on public enterprises will be adopted before December 1991. The tlmetable for the rehabilitation, privatization and liquidation of a certaln number of enterprLses has been revised and a copy is attached in annx. iLl ServLce Reform 58. Clvil servlce reform in Rwanda is necessary to make lt more efficient and to improve lts management. The functional structure of all the mlnistrles ie belng examlned in order to improve the lntegration of the tasks and functions of the various ministerial departments and to rationalize personnel management. The functions of each department will be reviewed and if necessary redefined so as to ensure greater efficiency. The links and relationships among the different departments will also be revlewed to ensure proper circulation of information among departments. The organization chart of the civll servlce will be updated to reflect these changes. 59. The regulations governing recruitment, promotions, careers and voluntary or compulsory departures will be amended. The rules governing mobllity will be clearly set out. The compensatlon pollcy for the Civil Service wlll be revlewed to ensure a closer link between wage increases and performance. The possibility of introducing a skill-based bonus will also be studied. 60. A study of the clvll service le under way wlth UNDP assistance. This study wlll be expanded and completed to take account of all the concerns mentloned above. On the basis of thie study, an action plan outlinlng the civil service reform program and a timetable for its implementatLon wlll be prepared before January 1992. 61. As part of this reform, institutlons resa;,siAble for the successful implementation of the structural adjustment program will receive specific attentlon: the MinLitry of Planning and the Ministry - 37 - ANEX A of Pinance, which monitor the implementation of thls program, perlodlcally, the progress made, and, if necessary, refocus it to ensure that it. objectives are met. B. Social Asnecta of Development 62. The Government is concerned about the deterLoration in the population' state of health as a result of the budget cuts in recent years and the alarming demographic expansion. The main social indicators, which for a long time have been above those for other African countrLes, now indLcate that Rwanda has fallen back to the average for the continent. Food production has not increased since the mid-1980. and hunger is now a permanent and disturbing problem. In 1989 almost 500,000 persons were sufferlng from famine since they lacked sufficient purchasing power to buy food in the market. The Government has therefore decided to establish a "social safety net" to protect on one hand the social sectors (health, education, population,...) in the context of a program of restrictive public spending, and to initiate on the other hand a siocial action program to assist the most vulnerable groups in the population. Health 63. In the health sector, the Government has decided to increase the present inadequate level of budgetary resources in order to meet the population's needs. First, budgetary allocation for purchases of medicine will be increased 10% in real terms compared to the particularly low allocation for 1990. In addition, to increase the available resources for public health facilities and to bring the level and qualLty of public health care closer to private sector standards, services will be priced so as to improve the recovery of nonwage operating costs. State subsidies will be targeted at the poorest groups to ensure their access to health care. The savings resulting from better cost recovery will be allocated to self-managed programs of national interest, such as the fight against AIDS and malaria. This decentralization of the financial management of public medical structures will begin before the end of 1991. In addition, budgetary allocations for public health facilities will be altered to reflect the volume of services provided to the population covered. Pouation 64. Aware of the problems arising from the explosive demographic growth, the Government has set up the Office National de la Population (ONAPO). The ongoing family planning campaigns will be intensified to reach the entire population and family planning services will be extended to all public or approved health facilities. An important population program to be financed by several donors is being implemented to support Rwanda's efforts in this area. Educat$on 65. To expand the coverage of education services to a larger section of the population, the Government has decided to take the following measures: (i) reduce the primary cycle from eight years to six; (ii) make greater use of day schools in the secondary cycle, and (1ii) increase beneficiaries participation in the financing of secondary and higher education. These measures will increase the resources - 38 - Una a available for education to extend the coverage of the educational system and improve its quality. Primary Education will have priority for additional resources allocated to the education sector. This new approach will improve the qualLty of educatlon in the prLmary ector in improving the school infrastructure, enhanclng the quallty of teachers reinforcing their supervLoLon and deploying them ratlonally. Aotions an Behalf of omen 66. The Government has made a serious attempt to improve the status of women. It will contlnue to recognlse the role that women play in economic and socLal development and will strengthen the measures to improve their living standards and reduce their work burden. The various reforms ln the social sector referred to above will have a defLinte Lmpact on the status of women. The general level of educatlon of the population as a whole will be raised and of women in partlcular. The measures pertaining to the health sector will improve the health status of the population and provide better protection for families and mothers ln particular. Social Assistance Project 67. In addition to maintalning soclal services at their present levels, the Government expects to develop, with assistance from donors, a series of programs to alleviate the potential impact of the economic crLsis on the most vulnerable groups of the population bys (i) financing the parental share of educatlon expenditures for children of the poo-'st families; (ii) introducing a food socurity program for populations in drought-affected areas; (iii) introducing labor-intensive works program for rural roads construction and soil eroslon protection; (iv) launching a micro-entrepreneurial development program; and (v) establishing a redeployment fund for civil servants who are laid off because of budget cuts. These programs will be elaborated in detail in a report to be lssued before June 30, 1991 and their implementation should start by the end of December 1991. Envr2oment. 68. The rational management of natural resources and the protection of the environment are an integral part of Rwanda' s development strategy. The Government is finalizing an environmental action plan which will be soon presented to the donors. This plan Lncludes: - establishing a legal and institutional framework to ensure the consistency of policies designed to protect the environment. - Lnforming and explaining to the population the importance of preserving the environment. - implementation of regional development programs. - pollution control and waste treatment. - rational exploitations of natural resources. - a program to promote soil conservation and reforestation. - controlling population growth. The objective of protecting the environment will be a part of all development projects. - 39 - ANNEX I Political ReformS 69. Tn parallel to current economic reforms, the Rwandess Government started since July 1, 1987 a process of democratization which should lead shortly to political pluralism. This should greatly contribute to the success of the program. Washington, May 3, 1991 Benoit NTIGULIRWA, Minister of Finance - 40 - AmX B REVISED TIMETABLE FOR THE PUBLIC ENTEEPRISES PROJECT Measure Action Dea4line Legal and Institutional Approval by Framework: Revision of the - Technical CIC 08/31/91 Basic Law on Public - Ministerial CIC 09/31/91 Enterprises - Government Council 10/31/91 - Adoption by the National Development Council 01/31/92 General Privatization Approval by Strategy - Technical CIC 07/31/91 - Ministerial CIC 08/31/91 - Government Council 09/30/91 Rwandese Republic Finalization 08/31/91 Divestitures Approval by - Technical CIC 09/30/91 -SONATUBES - Ministerial CIC 10/31/91 -Imprimerie Nationale du - Government Council 11/31/91 Rwanda -STIR -RWANTEXCO -Forge Gouvernementale -OVAPAM -P6rimetres rizicoles -Papeteries du Rwanda -ORTPN (hotel activity) Rehabilitation and/or Finalization 04/30/92 Restructuring of: Approval by - Technical CIC 05/31/92 -Malserie de Mukamira - Ministerial CIC 06/31/92 -OVIBAR - Government Council 07/31/92 -ORTPN (Tourism and - signature of program National Parks activities) contracts 09/30/92 -Regie des A6roports -BUNEP -ELECTROGAZ -Caisse Sociale du Rwanda -Sucrerie Rwandaise - 41 - AM=E a Meaux Acti Deadline Diagnostic Studies for: Finalization 12/31/92 Approval by -Caisse Hypothdcaire - Technical CIC 02/28/93 du Rwanda - Ministerial CIC 04/30/93 -AIR RWANDA - Government Council 06/30/93 _REDEMI -ONATRACOf -OCIR-T8E -OCIR-CAFE -OPRIVIA -TRAFIPRO -SONARWA -SOMITRAP -SONAFRUITS -OPYRWA -R6gis de 1l 'mprimerie Scolaire -MAGERWA -SODEPARAL -SoRWU -Caiss. d'Zpargne du Rwanda -Rgie Apicale -cimenterie -Laiteries -Petrorwanda -RWANDEX -BRD Contract-Plans for Finalization 12/31/93 Enterpriseo to be Approval by Rehabilitated among those - Technical CIC 01/31/94 Listed in Diagnostic Studies - Ministerial CIC 02/28/94 - Government Council 03/30/94 - Signature of program contracts 05/31/94 Privatization or Liquidation Finalization 10/31/93 Plans for Enterpries to be Approval by Privatised or Liquidated - Technical CIC 11/30/93 among those Llsted in - Ministerial CIC 12/31/93 Diagnostic StudLes - Government Council 01/31/94 _iI) - SM Policy ate ix Amex C - Page I Sector Objectives Measures Timetable t. Excbanoand Trade Poticy Reaime a. Exh e Rate Achieve a market clearing exchange An initial devaluation. Devaluation on 11/9/90. rate. The exchange rate policy will be regularly examined During prOgram period. and adjustments mill be made if necessary. b. Forei Exchange Liberalize ilports. Eliminatfon of Iaport prohibitions except for item June 1. 1991. Allocation and normally prohibited for health or security reasons. Iqort reget Prohibition will eventually be replaced by a suharge which will be eliminated in 1993. tptlementatfon of a "Liberalized lport Regime" CLIR) Anrounced on 11/9/90 and covering 70K of lpworts; teaporary iwport programing to take effect from aune 1, for essential goods, representing 30K of the value of 1991. Ieorts. Revision of Foreign Trade Law. June 30. 1991. Establish on open General Licensing System (O0.) to Before mid-1992.e cover alt Reports, except for petroleum. C. Tariff Regima Rationalize the tariff structure by Coinrt specific taxes to ad vatorem for all products, tiptmeented moing to ad valorin rates and to a except for petroleum products, beverages and (Law of 12/14/90). unifor structure with fewer tariff cigarettes. categories and reduced spread. first Ohase of tariff reform Incrrated in 1991 budet: Minima tariff at 10 Law of 12/14/90. Maxima tariff at 100X Jurie 1991. Wlesantation of 2nd phase of tariff refom In 1992 Budget 1992. budget. 2. incentives for Private Sector Growth a. Pricing Policies Eliminate price distortiona. Elinate all controls oeer profits margins except febuy 1991. for m WFpolies. Prices for natural mnopolies flied in wcwrdance with sound finacial prineiples. Abolish fixed prices for all products, except for a Armounted on 11/9/90 and smll mrer of goode and services. effective since February 1991. for goods ad services _e prices remaIn fixed, the Irptemented. full ilpact of the exchange rate adjustment will be posed through. b. Regulatory Liberali2e and siaplify procedures Abolish prior authorization for enterprise creatlon by July 1991.* Framework for business creation. the Ministry of Commerce. Prepare an action plan for the reform of institutional Jamiary 1992. framwork. Cndition of effectiv s -- Condition of secd tra release DEA - VAL fotliy Wat x Arls C - Pap 2 Sector ObJectives Neesures tih4ie Encourase labor mobilty. Latmah tabor mrket stud. Iuma 1991. Prepere action piln to lapteeent the ratmoiedatilom 1Id1992." of this labor mErket study. 3. SUatY Sfd. NUasus e. Agrieulturat Sector Expansion and divaroiffcetion of the Adopt a strategy for the develompmnt of agriculture. Xfd+f9S. agriculturat prodaction. Iqwove the efficiency of the coffee ltberaltze the entry In, the morket of gathering, Ipto ented. sector. processing nd export of ^ Establish export reference price. Aprit 1992.- Etflination of budjetary transfers to the Coffee 1991.- Stabitization fund. Prepare action plan based on sector strategy study. December 1991. b. EnergY ltopre sector efficieny. Electricity tariff increase of SO. Adopted on Aprit 26; effective from JAm 1, 1991. Estabish fifacfal objectives for ELECTUOGNZ end Deeebr 1991." adaption of a calendar to revise the tariff for electricity. Adaption of a contract-plan for ELECTROGAZ. Coapteto Pouer Nster Plan. End 1992. 4. P"blic Resource Wneoement a. Proorne and cqrroe progrmirn end monItoring of Agreement an the t991-93 PIP and t991 budget. Ioptemented. onwitoring of current and capital expenitures, P"tlic Expenditures bille ensuring social safety net*. Three-year por. 1992-9 for pubtSe xpendtures oh Secaer 1991. beatth, education. ariculture, trensport and pubtIc Wkrbs. Agremnt on 1992-94 PIP. Octtber 199.** Aremnt on the 1992 budet. Jway 1992." Prepae guide for puilfc Investment projects. Deceher 1991. Three-yea progmming for phtIc expenditures 1993 udet. extended to all sectors. Reduce the consolidated budget Policy of budgetary restraInts. Ouring pros period. deficit of the Central Government. b. Civit Service Rationalize civil service. Agreemet on action plan to reform civil service. Juwy 1992." *Cndition of effectivenes * Condition of second tranho rlteese - 44 - iiL ii 2i 2 g 5]5§'IJ i l I! | l- h i} tIt ,~ i !5 *0 1 ii V ~I~ i i - 45 - Annex D Page 1 of 5 28-4et-Si Table 1 MAMA - KEY INDICATORS (In percwnt ecept otherwise indlcated) 1988 1987 1888 188 19 9 I0 1991 1992 1993 1994 1995 Oroth Rates GOP 5.5 -0.3 0.3 -5.7 -2.0 1.0 3.7 3.8 3.9 4.0 Gross DOcmetic Iranco (GMY7 6.2 4.3 2.6 -5.7 -5.8 2.1 3.8 4.0 4.4 4.5 GoY womei InD e 2.4 -7.7 -1.1 -9.0 -9.2 -1.5 0.1 0.3 0.7 0.8 Private onsuwsthn per caPite 3.0 -8.1 -3.2 -10.8 -12.2 -2.7 0.1 0.2 0.2 0.3 External ebt Debt Service (mill. USS) 19.4 27V. 27.5 27.1 27.2 31.7 34.0 35.2 37.2 38.5 of uhich: Interest (miii. US$) 5.4 7.4 9.4 7.8 9.8 11.3 11.2 11.3 11.4 11.8 Debt Service 8.5 16.5 17.1 18.3 17.7 20.9 20.9 18.7 17.2 15.5 Total debt/GSP 22.2 28.8 28.7 28.0 28.8 28.3 27.4 28.2 28.8 29.2 Ratios to MP Gross Investment 15.9 15.8 15.7 15.8 12.5 15.9 15.8 15.8 15.9 16.0 Domaestic Savings 8.3 6.3 6.4 6.3 3.8 3.0 5.3 6.2 7.2 8.1 National Savings 8.2 8.2 6.3 0.2 3.4 2.2 4.8 6.0 7.0 8.0 PMbil IC investment 9.2 15.6 15.8 15.5 12.4 15.8 15.7 15.8 15.8 15.9 Private Investment . 8.7 5.9 6.9 8.8 7.3 7.9 7.8 8.1 8.7 9.2 Pt.I Ic Savins . 2.0 -0.5 -0.3 0.1 -5.2 -1.2 1.5 2.6 3.4 3.9 Governt Rensaus 13.8 13.5 13.1 13.8 12.4 13.2 12.6 13.1 13.5 13.6 Gover t RevP s and arats 16.5 15.8 16.6 17.1 15.7 16.8 16.1 18.0 16.2 16.1 Garoent af1Iture 21.2 23.9 21.8 21.1 24.2 22.4 19.2 18.3 17.4 16.7 Fiscal Deficit (Inc. grants) -4.7 -8.0 -5.2 -4.0 -8.4 -5.7 -3.1 -2.3 -1.2 -0.6 Fiscal Deficit (excl. grants) -7.4 -10.4 -8.7 -7.3 -11.7 -9.3 4.6 -5.2 -3.9 -3.1 Exteral sector E- rt volume aroft rate 17.8 1.5 -21.5 2.7 35.6 -8.3 4.5 4.5 4.7 4.8 Exports GWS/SP 11.7 7.8 6.9 6.8 7.2 8.2 7.6 7.9 8.3 8.7 Import voluDwe rot rate 8.0 -7.1 -0.1 -6.0 -11.1 12.8 -1.9 3.5 3.9 4.3 inots GFSSP 21.2 19.4 18.1 17.4 17.3 22.6 19.5 19.0 18.7 18.5 Current Accoimt (mlIi. US$) (1) -186.2 -252.9 -263.2 -232.7 -222.1 -280.4 -287.6 -270.9 -273.9 -278.3 Crrent Acwct/WP (1) 4-9. -11.7 -11.3 -10.7 -10.5 -15.2 -12.4 -11.4 -10.5 -9.8 Gross Official Reserves (miII. US$) 182.1 163.9 118.0 70.1 44.2 80.1 101.4 124.7 139.1 152.9 (montho of imports) 5.3 5.1 3.8 2.4 2.4 2.6 3.4 3.9 4.1 4.2 Net Offical Rleserves (MIII. US$) 144.6 134.4 97.8 54.1 -3.3 46.2 77.6 105.7 118.8 131.5 (Bmt Of iparts) 5.0 4.6 3.2 1.9 -0.1 1.5 2.5 3.1 3.2 3.3 1n ird credit lnestic credit -1.7 23.1 23.7 15.9 19.3 5.9 7.1 5.4 0.0 -1.1 Gbvernment -8.6 149.5 25.0 24.5 8 65.7 -4.8 -1.5 -4.7 -19.2 -27.7 Prrivate sectr -0.3 -0.3 23.1 11.9 -4.9 15.6 13.5 11.9 10.8 9.8 Money an *asi-Wy (112) 13.6 10.3 7.4 -4.2 5.4 21.9 13.3 7.9 2.0 0.8 Interest rate (one-year savings deposits) 5.0 5.0 5.0 5.0 12.0 .. .. iscewl laneous Inf latim rate, annual average -8.9 6.0 2.6 4.6 8.7 28.0 12.0 5.0 4.0 4.0 Ferl effective e ave rate -9.2 -0.2 1.4 -0.8 -8.2 .. .. Ratio of Experts GslFSlncrts l8NFS 55.2 40.1 38.3 39.1 41.8 36.3 38.8 41.8 44.5 47.3 Sources: Data provided by the Rwandese authorities; and Furd and World Bank staff estimates and projectlons. (1) Excluding offIclal grants - 46 - Annex D Page 2 of 5 274Utr-i Table 2 WAN ENAL FINCING : REOJIROdTS AID SOUES 1988 1889 I390 1891 1892 1893 1994 1095 (In ofIII=u of US) Exteral Finarelng Requirwms -242.4 -213.6 -175.1 -54.9 -319.9 -318.9 -3.9 -315.4 crrent ADcoznt 0lCliodrg not Official trawfers -233.2 -232.7 -Z22.1 -280.4 -287.8 -270.9 -273.9 -278.3 Alwrtizatlcn -18.1 -19.3 -17.8 -20.4 -22.8 -23.9 -25.8 -23.8 ftw In Arrears 0.0 0.0 6.8 48.8 0.0 Cha* In smvn 38.9 38.3 57.9 -47.5 -29.5 -25.0 -10.2 -10.2 IIF RCSfdam 0.0 0.0 0.0 0.0 0.0 0.0 0.0 . 0.0 Total Fluin ing Requiresmnts 242.4 213.8 175.1 354.9 319.9 319.9 309.9 315.4 Dlstmeants : Existing Comitmnts 242.4 213.8 175.1 35.3 38.8 40.8 29.0 25.1 Grants 139.3 127.8 122.7 Loans 81.9 64.2 45.9 35.3 38.8 40.8 29.0 25.1 Bllateral Creditors 19.1 17.4 11.3 11.7 11.2 12.8 7.0 5.8 lAltilateral Creditors 82.8 48.8 34.6 23.8 27.8 28.3 21i.9 19.5 of which : World Bar* 31.0 32.0 24.5 13.2 11.4 18.4 13.5 12.5 Private Creditors 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 SAF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Direct Investment 21.1 15.6 5.8 0.0 0.0 0.0 0.0 0.0 Other Capitals n.e.l 0.2 8.2 1.0 0.0 0.0 0.0 0.0 0.0 Disbursements : ExpeWted New Conmnltmnts 0.0 0.0 0.0 209.7 243.8 243.5 248.8 251.2 Grants 0.0 0.0 0.0 121.9 138.3 130.3 132.8 138.4 Loans 0.0 0.0 0.0 69.7 78.3 88.9 100.5 107.8 Bilateral Creditors 0.0 0.0 0.0 0.0 0.4 6.5 12.7 15.5 hultilateral Creditors 0.0 0.0 0.0 69.7 77.8 82.4 87.8 12.1 of which : World Bank 0.0 0.0 0.0 81.8 67.3 67.9 89.1 70.0 of which : Adjustment Lending 0.0 0.0 0.0 45.0 45.0 45.0 45.0 45.0 SAF 0.0 0.0 0.0 12.8 19.0 12.8 0.0 0.0 Direct Investment 0.0 0.0 0.0 5.8 10.1 11.8 13.3 15.3 Other Capitals n.e.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Identifled Financing 242.4 213.8 175.1 245.0 282.4 284.3 275.8 288.3 Speclal Program for Africa (SPA) 0.0 0.0 0.0 109.9 37.5 35.8 34.3 29.0 Sources: Data provided by the Rwandse authorities; and Fund and World Bank staff estimates and projeotlons. - 47 - Annex D Page 3 of 5 Table 3 264brl91 Rwanda : Balance of Payments. 1987-95 (in mIIIons of US$) 1987 1988 1989 1990 1991 1992 1993 1994 1995 4ET PFrojections (1) A. Exports of GootS & NFS 167.8 161.4 148.0 153.9 151.7 163.2 188.1 216.5 247.7 1. MerchandIse (FOB) 121.4 117.9 104.8 109.0 110.9 120.3 135.6 155.3 178.1 2. Non-factor services 46.4 43.6 43.2 44.8 40.8 42.9 52.6 61.2 69.6 B. Imports of Goods & NfS 418.4 421.0 379.0 368.1 417.8 420.6 452.2 486.0 523.3 1. Merchandise (FOB) 267.0 278.5 254.2 233.3 276.2 278.2 299.6 323.7 351.3 2. Non-factor 8ervIces 151.4 142.5 124.8 134.8 141.3 142.4 152.8 162.3 172.0 C. Resource Balance -250.6 -259.6 -231.0 -214.2 -265.8 -257.4 -264.1 -289.5 -275.8 0. Net Factor Income -9.9 -14.2 -9.9 -14.3 -22.1 -19.7 -19.0 -18.3 -18.5 1. Factor Receipts 10.0 8.3 8.9 3.8 5.0 7.4 9.6 12.0 13.6 2. Factor Payments -19.9 -22.5 -18.8 -18.2 -28.2 -27.1 -28.8 -30.3 -32.1 (Interest payments) -7.4 -9.4 -7.8 -9.8 -11.3 -11.2 -11.3 -11.4 -11.6 E. Net Current Transfers 7.5 10.8 8.2 6.5 7.8 9.5 12.2 13.9 15.7 1. Czrrent Receipts 28.8 32.2 27.5 28.6 29.2 32.0 35.8 38.3 41.0 a. total 28.8 32.2 27.5 26.8 29.2. 32.0 35.6 38.3 41.0 b. other current transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2. Current Payments 21.3 21.8 19.3 20.0 21.8 22.5 23.4 24.3 25.3 F. Durrent Acc. Ba). (no grants) -252.9 -283.2 -232.7 -222.1 -280.4 -267.8 -270.9 -273.9 -278.3 '. LoneTerm Capital Inflow 226.7 224.1 188.1 156.5 212.1 240.7 247.6 249.7 259.5 1. Direct Investment 17.5 21.1 15.6 5.6 5.8 10.1 11.8 13.3 15.3 2. Off lclal Capital Grants 118.6 139.3 127.6 122.7 121.9 138.3 130.3 132.8 138.4 3. Met ong Term Loans 89.9 63.0 45.5 28.3 84.8 94.3 105.8 103.8 105.8 a. DIsbursements 110.1 81.1 64.8 45.9 105.0 117.1 129.7 129.4 132.7 b. Repayments 20.2 18.1 19.3 17.6 20.4 22.8 23.9 25.8 26.9 4. Other LT Infls (net) 0.7 0.8 -0.6 0.0 0.0 0.0 0.0 0.0 0.0 M. Total Oter Items (net) 7.8 0.2 6.2 1.0 0.0 0.0 0.0 0.0 0.0 1. Net Sort Term Capital 11.4 -2.2 4.9 -1.6 0.0 0.0 0.0 0.0 0.0 2. Capital Flowsn.e.l. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3. Errors andl0Osslons -3.8 2.4 1.3 2.8 0.0 0.0 0.0 0.0 0.0 1. FlnancIng 18.4 38.9 38.3 64.8 -41.5 -10.5 -12.2 -10.2 -10.2 1. Net Credit from the IMF 0.0 0.0 0.0 0.0 12.8 19.0 12.8 0.0 0.0 2. Net Reservsem l Oies 18.4 38.9 38.3 57.9 -47.5 -29.5 -25.0 -10.2 -10.2 3. Arrears 8.8 -6.6 J. FInamcing gap 0.0 0.0 109.9 37.5 35.6 34.3 29.0 Share Of GaP: 1. Resorce Balce -11.6% -11.3 -10.6% -10.1% -14.4% -11.9% -11.1X -10.4S -9.7% 2. Current account defIlcIt Excluding offIclal transfers -11.7% -11.3X -10.7% -10.4% -15.2% -12.4% -11.4% -10.5% -9.8% Includlng off Iclal transfers -8.2Z -5.3% -4.8% -4.7% -8.6% -.1% -5.9% -5.4% -4.9% irand Items: ap MP 2157.8 2327.4 2178.8 2125.8 1847.8 2181.0 2380.3 2599.5 2835.5 wanda francsAlS$ 79.87 78.45 79.95 82.88 119.37 118.55 117.33 118.14 115.12 Sources: Data provided by the Randese AtOltles; and Fud and Wrd Bark staff estimates and projectIons. (1) Asaming full I lementatlon of proposed program. - 48 - Annex D Page 4 of 5 Sodal ndlcators of Devdopment, 1990 Table 4 Rwanda 2S.30 15J20 c1 . . . \ / ~~~~~~~~~~~~~~~~~~~~~~~~~~MttES 0 5 10 is 20 25 30 | '0~~~~~~~~~~~~~~~~~~~~~~2- do - 2f- 20'1V 20930 RWANDA UGANDA STRUCTURAL ADJUSTMENT LOAN I T A N Z A N I A * NAMONAL CAPrTAL 4. (j PREFECTURE CAP.TALS -MAIN ROADS COMMUNE BOUNDAR7ES G jd" PREFECTURE BOUNDARIES - INTERNATIONAL 8OUNDARIES G S 'Af/,';:An \*9 -25bo \ ~~~~~~~~~~~~~~~Kibuyel IA / lK JG \2 _ 73=30' r v Dt s ~~GIKONGORC )2 UGACyA gENYgu C CYkotgoro gRWANDA X ;< KE;A RE B8URUNDI | < t ( Butetre BURUNDI TANZANIA ZAIR to 0 || ~~~~Z A I R E < °5 r ° - t= Ki\LOMBTES 0 S tO 15 20 2i4530- E . ;O ZA M ,