Remittances, stepped up Covid-19 vaccination and structure reforms supporting Rwanda’s economic recovery- IMF Staff

Unprecedented policy support, robust remittances, efforts to step up the vaccination rate, and progress in structural reforms are supporting economic recovery in 2021, with growth projected at 10.2 percent, from a sizable contraction of 3.4 percent in 2020, according to the latest International Monetary Fund (IMF) Staff Concluding Statement of the 2021 Article IV Mission and Fifth Review of the Policy Coordination Instrument (PCI)

“The outlook is benefiting from positive spillovers from the global recovery. Policies to attract private sector investment and manage climate change will remain key for more durable, inclusive, and resilient growth.”

To address social challenges and limit pandemic scars, IMF Staff argue that the authorities in Rwanda should protect social programs and sustain human capital investments while implementing a growth-friendly fiscal consolidation supported by a credible revenue mobilization and an improvement in spending efficiency. Fiscal risks should continue to be closely monitored by transparent reports of performance of public-private partnerships and state-owned enterprises.

They continue that monetary policy should remain data-driven to support the recovery and ensure inflation expectations remain anchored. It will be important to proactively address any emerging credit risks as extraordinary support measures are withdrawn.

An IMF mission, led by Haimanot Teferra, held virtual meetings with the Rwandan authorities during October 18 – November 15, 2021, to consult under the Article IV and discuss the fifth review of the PCI.

Recent Developments and Outlook

A targeted and accelerated vaccine rollout has helped in keeping infections low. With 21 percent of population fully vaccinated as of November 15 (mostly since July), Rwanda’s vaccination campaign aims at raising this ratio to 60 percent by end-2022. In Rwanda’s capital, Kigali, almost 90 percent of adult population is already fully vaccinated.

Rwanda’s Growth is projected to rebound very strongly to 10.2 percent in 2021. Economic activity contracted by 3.4 percent last year, with a sizable impact on the service sector. Poverty and unemployment, especially among women, also rose, undoing some of the progress in recent years. The economy is projected to rebound strongly in 2021, helped by sustained fiscal stimulus and an accelerated vaccination rollout. As a result, the output gap is expected to be closed by early next year. Headline inflation stood at 0.6 percent, year-on-year, as of October 2021, largely reflecting lower food prices due to positive weather shocks and lower administered transport prices. However, as these effects fade, inflation is expected to rise to 5.7 percent in 2022, reflecting higher aggregate demand and commodity prices.

The current account deficit is projected to remain large in 2021 at 11 percent of GDP. This is driven by a pickup in imports as economic activities resume. While FDI inflows remained subdued as some large investment projects are delayed, gross international reserves stood at 5.5 months of prospective imports at end-September bolstered by the recent SDR allocation. Over the medium term, the external position is expected to improve through increases in domestic savings, particularly the envisaged fiscal consolidation and productivity growth supported by ongoing structural reforms.

Significant downside risks remain while pandemic scars could hamper longer-term growth. New COVID-19 variants or vaccination delays present downside risks, which would undermine confidence and the nascent recovery. With limited policy space, a more protracted pandemic would lead to difficult trade-offs, worsening the fiscal and debt outlook, stressing the external position, and leaving scars through its impact on human capital accumulation and longer-term growth.

Fiscal policy is reoriented to be supportive of the nascent recovery. The fiscal deficit is anticipated to increase to 9.1 percent of GDP in fiscal year 2021–22 (from 8.6 percent of GDP in 2020–21), partly reflecting additional spending related to mitigating the pandemic impact using part of the 2021 SDR allocation and measures such as temporary tax incentives for manufacturing and construction under the Manufacture and Build to Recover Program (MBRP) to fast-track the recovery.

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