Documentof The WorldBank FOROFFICIAL USEONLY ReportNo: 35331-RW INTERNATIONALDEVELOPMENT ASSOCIATION INTERIM STRATEGY NOTE FOR THE REPUBLICOFRWANDA FY07- FYOS August 16,2006 Country Management Unit 9 Africa Region This document has a restricted distribution and may be used by recipient only in the perfomance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization The Republic of Rwanda CURRENCY EQUIVALENTS SDR 1.00=US$1.48 US$l.OO = Rwf 552.13 (as of Jun. 6,2006) FISCAL YEAR: January 1 December 31 - Currency Unit - - RF(Rwanda Franc) - 2000: US$1.oo 1990: US$l.OO - RF 83 - - RF428 2005: US$l.OO - - RF 570 (as ofMar. 15,2005) ABBREVIATIONS AND ACRONYMS AfDB African DevelopmentBank MAP Multi-Country HIViAids Program APR Annual Progress Reports MIGA Multilateral Investment Guarantee Agency ARV Anti-Retroviral Treatment MDRI Multi-lateral Debt Relief Initiative BADEA Arab Bank for Economic MOH Ministry o f Health Development inAfrica BCR Banque Commerciale du Rwanda MINEDUC Ministry o f Education BK Banque du Kigali MINECOFIN Ministry o f Finance and Economic Planning BNR Banque Nationale du Rwanda MINIJUST Ministry o f Justice BPP Budget Priority Program MINALOC Ministry o f LocalGovernment CAS Country Assistance Strategy M o U Memorandum o fUnderstanding CDF Common Development Fund MSCBP MultiSector Capacity BuildingProgram CEDP Competitiveness and Enterprise MTEF Medium Term Expenditure Framework Development Project CEPEX Central Projects Bureau NBR National Bank o f Rwanda CFAA Country Financial Accountability NEPAD N e w Partnerships for Africa's Development Assessment CIRR Commercial Reference Interest NGO Non-Governmental Organization Rate CPIP Country Procurement Issues Paper N P L Non-Performing Loan CPPR Country Portfolio Performance N I C I National Information and Communication Review Infrastructure CRDP Community Reintegration and NORAD Nordic Development Fund Development Project DCDP Decentralization and Community NTB National Tender Board Development Project DDR Disarmament Demobilization and OAG Office o f the Auditor General Reintegration Program DMFAS Debt Management and Financial OBL Organic Budget L a w Analysis System DPT3 Diphtheria, Pertusis, Tetanus OCIR-Cafe Office des Cultures Industrielles Rwandais- Cafk (coffee parastatal) DPCG Development Partners Coordination OCIR-The Office des Cultures Industrielles Rwandais- Group The (tea parastatal) DTIS Diagnostic Trade Integration Study OPEC Organization o f PetroleumExporting Countries DRC Democratic Republic o f Congo PEMR Public Expenditure Management Review D S A Debt Sustainability Analysis PRTF Procurement Task Force EDPRS Econ. Development & Poverty PRGF Poverty Reduction and Growth Facility Reduction Strategy EICV Household Living Conditions PRS Poverty Reduction Strategy Survey P F M Public Financial Management ESAF Enhanced Structural Adjustment PEFA Public Expenditure and Financial Facility Accountability ESW Economicand Sector Work PEPFAR President's EmergencyPlanfor Aids Relief EU EuropeanUnion PRSCIG PovertyReductionSupportCrediUGrant FARAP FinancialAccountabilityReview PSCBP Public Sector Capacity Building Project and Action Plan FSAP Fin. Sector Assessment Program PRSP PovertyReductionStrategy Paper EAC EastAfrican Community RIEPA RwandaInvestment and ExportPromotion Agency ex-FAR ex soldiers ofForcesArmees du RITA RwandaInformationandTechnology Rwanda(pre-genocidearmy) Authority GDP Gross Domestic Product RURA Multi-sectoralRegulatoryAgency GoR Government ofRwanda RPF RwandaPatrioticfront GTZ GermanTechnicalAssistance STI Science, Technologyand Innovation Agency HIV/AIDS HumanImmunodeficiencyVirus/ SER Sector Expenditure Review Acquired Immunodeficiency Syndrome HIDA HumanResource andInstitutional SIDA SwedishDevelopmentAgency Capacity DevelopmentAgency HIPA HumanResource andInstitutional SWGs Sector Working Groups DevelopmentAgency HIPC Heavily IndebtedPoor Countries SOE State OwnedEnterprise IDA InternationalDevelopment SME Smalland MediumTermEnterprises Association IFAD InternationalFundfor Agricultural SWAP Sector-Wide Approach Development IFC InternationalFinanceCorporation SIDA SwedishInt'l Development Agency IMF InternationalMonetaryFund UK-DFID United Kingdom-Departmentfor InternationalDevelopment ICT Informationand Communications UER UrgentElectricity Rehabilitation Technologies IPRSP InterimPovertyReductionStrategy UNCDF UnitedNations CapitalDevelopmentFund Paper IRC InstitutionalReformCredit UNDP UnitedNationsDevelopment Program I S N Interim Strategy Note UNCTAD UnitedNations Conference for Trade and Development ISARL IntraspeedSA RwandaLtd UNICEF UnitedNations InternationalChildren's EmergencyFund JSAN Joint StaffAdvisory Note UNIDO UnitedNations IndustrialDevelopment Organization LDP Letterof DevelopmentPolicy URC NationalUnity andReconciliation Commission LIC Low Income Countries VAT Value Added Tax LAN Local Area Networks WHO World HealthOrganization Vice President: Gobind Nankani Country Director: Pedro Alba Acting Country Manager: Chantal Kajangwe Task Team Leader: Kene Ezemenari Task Team: Rahel Kassahun, Miguel Saponara, Negda Jahanshahi, Rwanda Country Team The last Country Assistance Strategyfor the Republicof Rwandawas discussedat the BoardonTuesday, December 3, 2002, ReportNo. 24501-RW. FOROFFICIAL USE ONLY This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. RWANDA INTERIM STRATEGY NOTE TABLE CONTENTS OF EXECUTIVE SUMMARY ................................................................................................ 3 Background................................................................................................................. 3 The PlannedBank InterimAssistance Strategy.......................................................... Implementation of2002-06 CAS................................................................................ 4 4 INTRODUCTION.............................................................................................................. 6 I. COUNTRYCONTEXT................................................................................................ 7 A. Background......................................................................................................... 7 B. 10 12 D. Medium-Term OutlooWFutureProspects......................................................... C. Implementation ofthe PRSP 2002-05 .............................................................. The Government's Vision................................................................................. 19 I1 IMPLEMENTATIONOF THE LAST CAS .............................................................. 23 A. 24 B. Portfolio Management ...................................................................................... Lending andNon-Lending Services ................................................................. 25 C. What Worked Well andWhat Worked Less Well............................................ 25 32 I11. THE PROPOSEDBANKGROUP INTERIM STRATEGY................................... D. IFC & MIGA..................................................................................................... 33 A. IDA Allocation and Instruments....................................................................... 37 B. 39 40 D. Donor Roles andCoordination ......................................................................... C. Non-lending Services........................................................................................ IFC & MIGA..................................................................................................... 42 43 43 I V. CONSTRAINTS & MANAGINGEXPOSURE...................................................... F. E. Monitoring and Evaluation Arrangements........................................................ Consultations...................................................................................................... 44 Listof Tables Table 1: Selected Economic PerfonnanceIndicators...................................................... 21 Table 3: LinksbetweenAAP andthe Interim StrategyProposedOperations/AAA .......28 Table 2: ProgressinCore 2002 CAS Monitoring Indicators........................................... 37 Table 4: CPIA and Portfolio Management: Areas for Improvement............................... 38 Table 5: ProposedLending inthe InterimPeriod(US$ millions) ................................... Table 6: InterimStrategyPlannedKey Non-Lending Services....................................... 39 40 ListofBoxes Box 1: Summaryo f Achievements and Key Issues inthe Implementation o fPRSP I.... 16 Listof Figures Figure 1: Trends inGovernance Indicators ....................................................................... 9 Figure2: Comparisono f Governance Indicators with Sub-Saharan Africa Average ..... 10 List of Annexes Annex 1: Performance Indicators and Targets by end o f Interim StrategyPeriod...........46 Annex 2: Overview of Selected Reforms. 2000-2005...................................................... 48 Annex 3: MDGAchievements and Long-Term PRSP Targets ........................................ 49 Annex 4: Status o f Active Operations .............................................................................. 50 Annex 5: Summary o fNon-Lending Services .................................................................. Annex 6: Selected Indicators o f Bank Portfolio Performance and Management.............52 53 Annex 7: Engagement o f Development Partners inRwanda............................................ 54 Annex 8: Summary o f in-country Stakeholder Consultations for the I S N....................... 55 Annex 9: Rwanda- Annex 10:Country Indicators........................................................................................... Joint Fund-World Bank Debt Sustainability Analysis ...................57 65 RWANDA INTERIM STRATEGY NOTE EXECUTIVESUMMARY 1. This Interim Strategy Note (ISN) extends the current Country Assistance Strategy (CAS) to ensurethat the upcomingjoint (BanWDFID),CAS is alignedwith Rwanda's second Poverty Reduction Strategy Paper (PRSP). The current CAS, covers the period 2002-2006, and supported the Government's first PRSP. Preparations for the second PRSP, now called the Economic Development and Poverty Reduction Strategy (EDPRS), has been launched, and will culminate inthe publication o f a strategy paper in the fall o f 2007. An ISN, to cover the period FY07 and FY08, will therefore ensure that the next CAS, to cover the period 2008-2012, i s aligned with the EDPRS. 2. At the beginning o f the CAS period, Rwanda was still in the transition period from conflict to development. Consequently, the 2002 CAS was focused on laying the foundations for growth and. sustainable human development mainly through policy lending and by establishing a sound analytical basis for development strategies and programs. This I S N aims to consolidate gains in the social sectors as well as the institutional policy framework and support growth through a mixture o f investment lending,policy lending and analytical and advisory work. Background 3. Since 1994, Rwanda has been able to maintain overall macro stability and implement extensive reforms which have contributed to the strong growth performance observed over the past decade. Economic growth was driven by the recovery in subsistence agriculture and a construction boom during the reconstruction phase. For the period 2002-05, Rwanda's growth rate averaged close to 5 percent with low and stable inflation. The Government's overall good macro-economic management i s evidenced by the successful completion of the sixth review of the Poverty Reduction and Growth Facility (PRGF), which was discussed at the FundBoardon June 5,2006. 4. In addition to good macro-economicperformance, non-incomeindicators of poverty have improved significantly. In particular, primary school net enrollment is now at 93 percent, and the vaccine coverage rate for all antigens i s between 80 and 95 percent in most provinces. In the case o f income poverty, the 2001 Household Living Conditions Survey (EICV) found that 60 percent o f the population fell below the poverty line. This measure o f poverty will be updated once the second EICV, which i s currently in the field, is completed. It is expected that the results from the analysis will be available early incalendar year 2007. 5. On the social and political front, the country is at peace and secure. Nevertheless, Rwandans continue to struggle with the legacy o f genocide. Rwandan genocidal leaders are on trial at the International Criminal Tribunal for Rwanda, in the Rwandan National Court system, and most recently, through the informal Gacaca village justice program. The Government i s also making progress in national reconciliation 3 through reintegration o f ex-combatants, putting in place the legal framework to implement the anti-discrimination provisions enshrined in the constitution enacted in June 2003, and implementingreconciliation initiatives through civil society groups and communities. Implementationof 2002-06 CAS 6. An interim assessment of the CAS concludes that overall, the Bank's assistance program was relevant to the medium- and long-term strategic development goals of the country. It supported the Rwandese Government in undertaking key reforms to promote an improved economic environment for growth and continued progress in meeting the social sector targets. In addition, the CAS supported the Government's effort to reach the HIPC Completion Point and to establish key institutions related to good governance. The Annual Progress Reports (APRs) o f the PRSP also acknowledged the critical support provided by the Bank and other donors toward the economic and political stabilization of the country. Duringthe CAS period, the Bank, donors and Government worked in partnership on the development o f sector strategies and Medium-Term ExpenditureFrameworks (MTEFs), which serve as a basis for Sector Wide Approaches (SWAPS)with harmonized features, and provided further impetusto the harmonizationprocess. The PlannedBankInterimAssistance Strategy 7. This ISN takes into account key issues arising from initial consultations on the EDPRS. During the CAS period, Rwanda has made considerable progress in the reform o f the economy and the implementation o f the PRSP, supported by a series o f poverty reduction creditdgrants by the Bank, with increased partnership within the donor community. However, growth has continued to average about 5 percent per annum, and i s below the pace required to meet the poverty reduction goals o f the PRSP and meet the MDG target o f 25 percent poverty incidence by 2015. Poor infrastructure, particularly energy, water and transport has constrained private investment and productivity. Also, capacity has remained a major constraint to the implementation o f development and governance relatedprograms, particularly at decentralized levels. 8. The strategic elements of the ISN include:(i) consolidating the results o f the current CAS by sustaining the gains made in the social sectors and improving public financial management; (ii) increasing the focus on economic growth and on capacity building to strengthen preparation and implementation o f development and governance programs; and (iii)further improving coordination and harmonization o f development assistance across donors to improve aid effectiveness and reduce transaction costs for Government. The strategic thrust o f the ISN i s in line with the key areas o f the Africa Action Plan. The following are the proposed instruments: Support to social service delivery: The Poverty Reduction Support Grant (PRSG) (US$50 million each year) will continue to be the main instrument to support policy implementation in education, health, energy and water. The focus will be on strengthening the performance-based approach to service delivery. The 4 PRSG will also scale up support to service delivery in the agriculture and infrastructure sectors, with emphasis on support to policy development and implementation, to promote growth. Particular attention will be given to technical assistance to support the decentralization process. Inaddition to the PRSG, the MAP supplemental (US$lO million) will continue to focus on prevention of HIV/AIDs while providing care and support to those infected with the disease. The PRSG will also support reforms in financial management to facilitate improved accountability and transparency. A Public Expenditure Review, Poverty Assessment, and Country Status Reports in the education and health sectors will form the analytical basis for the policy lending. Support to capacity building: This element o f the strategy will support technical assistance to facilitate the preparation and implementation o f the EDPRS. This will be supported by the planned analytical work including a Country Economic Memorandum, an Agriculture Policy Note, and an Investment Climate Assessment. There will also be increased focus on strengthening the capacity o f public financial management, with emphasis on fiduciary aspects, the monitoring and evaluation (M&E) system, improved procurement practices, and development o f an outcome focused medium-term expenditure framework (MTEF). The PRSGwill again form the main vehicle of support under this area. Inaddition, the E-Rwanda project (US$lO million) will support the strengthening o f the government's financial management system, while increasing the accessibility o f citizens to information on government programs. Support to generating growth: The focus will be on support to ease the main infrastructure constraints to growth inthe energy, water, and transport sectors. In the energy sector, the Lake Kivu-to-Power Guarantee (US$3.75 million) will facilitate development o f public-private partnerships for the Lake Kivu Gas- Methane Project, financed by IFC and other private investors. The Transport Sector Development (US$lO million) project will support the maintenance o f Rwanda's road network. These projects will complement ongoing trade and infrastructure projects in the portfolio (see Annex 4). Moreover, IFC and the Bank will provide business development support to SME's. A Science and Technology Needs Assessment will inform this aspect o fthe ISN. Overall, the ISNwill continue to support the broader harmonization agenda inthe country in close collaboration with other development partners. These will include support to development o f SWAPS,joint analytical work, and the joint development o f a country assistance strategy. 9. A preliminary estimate of IDA funds available for this ISN amounts to US$134 million. The FY06-08 IDA envelope for Rwanda is US$209 million. Two new projects, totaling US$75 million have beenpresentedto the Board inFY06: PRSG2 and the Urban Infrastructure and City Management. The allocation for FY07 i s US$84 million and the indicative amount for FY08 is US$50 million. 5 INTRODUCTION 10. This Interim Strategy Note (ISN) extends the current Country Assistance Strategy(CAS) to ensurethat the next CAS is alignedwith Rwanda'ssecond PRSP. The Government o f Rwanda is currently inthe process o f preparing its second PRSP, the Economic Development and Poverty Reduction Strategy (EDPRS), expected to be finalized in October 2007. The current CAS, discussed by the Board on November 21, 2002, covers FY 2002-06. The next CAS, to be prepared jointly with DFID, will be based on the EDPRS, and will be presented to the Board in fiscal year 2008. This I S N will cover the period FY07-08, and will bridge the gap between the two full CASs, to enable alignment o f Bank assistance with the EDPRS. 11. In the last decade, Rwanda has emerged as a strong reformer. The Government has embarked on a comprehensive liberalization o f its economy, initiated legislative reform, promoted trade, and pursuedregional integration. Reforms undertaken to improve contract enforcement, access to credit, and cross-border trading earned the country a position among the top 12 reformers in the 2006 Doing Business Report. The 2006 Doing Business Report also mentions Rwanda as a good example o f a reformer o f business regulation in Africa. To enhance public sector productivity, the Government strengthened its reform program in the areas o f revenue administration, public expenditure, and financial management. 12. The current assistance strategy supported the Rwandese Government in undertakingkey reformsto promoteprogressin meetingtargets in the social sectors and an improved economic environment for growth. During the CAS period, Government focused more on rebuildinginstitutions and improving social indicators than directly increasing economic growth and productivity. This resulted in significant improvement in education and health outcomes. However, in order to achieve its long term development objectives, the government acknowledges that it must accelerate the growth rate, which has averaged about 5 percent over the last three years. This interim assistance strategy extends the current program with an aim to build on the significant achievements gained so far, to promote increased growth and productivity. 13. The ISN is organized as follows: Part Ipresents an overview o f the country context and recent developments. Part I1 reviews the implementation o f the 2002-06 CAS and discusses progress made to date, highlights some o f the key lessons learned, and outlines areas which will need greater attention in the EDPRS. Part I11 describes the Bank's interim strategy for support to Rwanda, and Part IV discusses constraints and management o f risks to the program. 6 I.COUNTRYCONTEXT A. Background 14. Rwanda has made a remarkable transition from reconstruction to development over the past eleven years. The 1994 genocide decimated Rwanda's fragile economic base, destroyed a large share o f the country's human capital, totally undermined domestic as well as foreign investor confidence, and severely impoverished the population, particularly women. Although poverty levels remain high, at 60 percent o f the population according to the latest estimates, substantial progress has been made in stabilizing and rehabilitating Rwanda's economy. As a result o f the extensive economic reform and governance measures taken between 1995 and 2005, GDP growth rates averaged 7.4 percent per annum. Inflation has been contained under 10 percent since 1997, with the exception o f 2004 when it reached 12 percent. By 1998, GDP had recovered its pre-1994 level. Recently, however, the rate o f GDP growth declined to an average o f 5 percent (between 2002 and 2005). In order to achieve the Government's long term development goals, the EDPRS i s expected to have a strong focus on growth, with particular attention to program implementation. 15. On the social and political front, the country is at peace and secure. Nevertheless, Rwandans continue to struggle with the legacy o f genocide. Given the level o f destruction o f the social fabric that took place during the genocide, national reconciliation i s a long-term endeavor that has had the full commitment o f the Government. As noted in a recent independent evaluation o f the PRSP', the Government's strategy reflects its commitment to overcome the causes and consequences o f the genocide and to transform the society. To promote peace and reconciliation, the Government: 0 adopted a model o f democratization focused on a decentralized administration to empower local communities and improve social service delivery. Inline with this vision, a decentralizationpolicy was issued in2000 and implementation o f the policy i s ongoing; 0 continues to work towards bringingto justice those that perpetrated the atrocities o f 1994, while striving to promote national unity and reconciliation. Rwandan genocidal leaders are on trial at the "International Criminal Tribunal for Rwanda", intheRwandanNational Court system andmostrecently, through the traditional Gacaca village justice program; and 0 continues to make progress innational reconciliation through demobilization and reintegration o f ex-combatants, putting inplace the legal framework to combat discrimination, and implementing reconciliation initiatives through civil society groups and communities. 'The independentevaluation ofRwanda's PRSP was conductedby consultants from Institute of Development Studies (IDS) and Overseas Development Institute (ODI). 7 16. Rwandahas made substantialprogresson the MDGtargets relatedto gender parity in primary education, immunization of infants against measles, and containment of the spread of HIV/AIDS. The most challenging goal is related to reducing maternal mortality rates, which will require substantial upgrading o f the health care system. Despite significant improvement in the last five years, indicators for child mortality also continue to be poor. Annex 3 summarizes the progress made and the likelihood o f Rwanda meeting its MDGs. Progress has also been made on reducing income poverty. An estimate of poverty before the genocide, which used a poverty line based on the 1985 household budget survey, revealed that 50 percent o f the rural population was poor in 1990. Poverty dramatically increased following the genocide, reaching 78 percent o f the population in 1994 (82 percent inrural areas and 28 percent in urban areas). By the year 2000, the proportion o f the poor had declined to 60 percent. As the economy has continued to perform well since 2000, while inflation has been contained, it i s likely that the ongoing household expenditure survey (EICV), expected to be available early in calendar year 2007, will show improvement in the poverty incidence. 17. At the regionallevel, Rwandahas been engaged in a number of initiativesto promote peace and stability. A tripartite agreement between Rwanda, DRC, and Uganda was signed inOctober 2004 to address regional border issues. The Governments o f Rwanda and DRC, in cooperation with the UNMission in the DRC (MONUC) have been increasing pressure on the FDLR (Forces Dkmocratiques pour la LibCration du Rwanda), based in Eastern DRC, to honor their commitment to end all military activities and return to Rwanda. The framework for resettlement and reintegration o f refugees, including ex-combatants, remains in place to deal with returnees. The Rwanda Demobilization and Reintegration Program i s anchored within a regional partnership for the demobilization and reintegration activities in the Great Lakes. Rwanda's commitment to promote stability and peace in the region i s also demonstrated by its participation inthe African Union's peace-building force inDarfur. 18. Macro-economic management has been satisfactory, as evidenced by the successful completion of six reviews under the IMF's Poverty Reduction Growth Facility (PRGF). Following the completion o f the sixth review, a three year PRGF arrangement was approved by the IMF Board, on June 5, 2006. Strong implementation o f macroeconomic policies has enabled Rwanda to reach the HIPC completion point and qualify for the Multilateral Debt Relief Initiative (MDRI). However, challenges remain inmanaging the macroeconomic impact o f higher aid flows. The high inflow of aid in 2005 gave rise to a dilemma on the part o f Government on how to manage the macro- economic effects o f a potentially large injection o f liquidity into the econom$. 2 The dilemma arose from a reluctance on the part o f Government to either: (i) a nominal exchange allow rate appreciation, as they were concerned with its potential adverse impact on external competitiveness and on exporters' capacity to repay their bank loans; or (ii) sterilize excess liquidity through issuing government treasury bills due to the cost associated with the process and the risk o f crowding out the private sector. Government's concern over the unpredictability o f aid also has led to an increase inexternal reserves to buffer potential short-term falls, instead o f spending or investing the resources inproductive activities. More recently, however, the Government has decided to significantly increase imports 8 19. There has beena consistentimprovementingovernanceindicatorsover time. According to the Governance Research Indicator Country Snapshot indices o f corruption compiled by the World Bank Institute, between 1998 and 2004, Rwanda improved its record on all six indicators, namely voice and accountability, political stability, government effectiveness, regulatory quality, rule o f law, and control o f corruption (see Figure 1). Compared to the average for sub-Saharan Africa, however, Rwanda ranks relatively poorly on voice and accountability, political stability, and the rule o f law, due to the previous years o f civil conflict. It ranks better in terms o f government effectiveness, regulatory quality, and control o f corruption (see Figure 2). Bilateral donors, such as USAID, are actively working with Government to create a more open political dialogue, with technical assistance and capacity building for enhancing the democratic process and good governance. Moreover, the Government's decentralization program could significantly improve voice and accountability as well as good governance as decision making moves closer to the beneficiaries and with the implementation o f citizen scorecards and other accountability mechanisms. Figure 1: Trends in GovernanceIndicators RWANDA (2004) Governnent Effectiueness Regulatory Quality Rule o f Lau e 25 50 75 1 B Conparison betueen 2004, 1998 (top-bottom order) Country's Percentile Rank (0-100) Note: Horizontal lines represent confidence intervals. particularlyto support infrastructure development. This should facilitate sterilization while also supporting the productive sectors and strengthening external competitiveness. 9 Figure2: Comparisonof GovernanceIndicatorswith Sub-SaharanAfricaAverage RWFlNDA (2004) Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule o f Lau Control o f Corruption I I E 25 75 1 ~~ Comparison uith regional average (Subsaharan Africa) (louer bar) Country's Percentile Rank (8-188) Note: Rwanda (upper bar). Horizontal lines represent confidence intervals. B. The Government'sVision 20. The GoR's long-termvision is outlinedin its Vision 2020 document. Init, the Government has articulated an ambitious development program, which aims to transform Rwanda to a middle-income country by the year 2020. The bold targets o f Vision 2020 include increasing per capita GDP from US$230 in 2000 to US$900 in 2020, reducing the proportion o f the poor from 60 percent o f the population to 25 percent, increasing life expectancy from 49 to 65 years, and increasing the literacy rate from 48 to 90 percent. Top among the key objectives o f Vision 2020, i s good political and economic governance. 21. While Vision 2020 articulates the GoR's long-term aspiration for the country, the PRSP provides the operationalframework for poverty reduction and growth for the medium term. The PRSP provides a comprehensive diagnosis o f the causes o f poverty and outlines the key objectives and actions requiredfor reducing it. In order to reduce the proportion o f the poor from 60 percent to 30 percent by 2015, the government estimated in2002, that given a consistent population growth rate o f 3 percent per annum, GDP would have to grow by at least 7 percent annually. Achieving this 10 objective i s the main challenge the government faces given Rwanda's population growth andthe current state o f infrastructure. 22. T h e first PRSP outlined six priority action areas: (a) rural development and agricultural transfornation; (b) human development; (c) economic infrastructure; (d) good governance; (e) private sector development; and (0 institutional capacity building. The PRSP stressed the importance o f defining sectoral strategies and associated MTEFs to guide public actions for implementation. It also highlighted the challenges that required immediate attention, such as the impact o f HIV/AIDS, shelter for the homeless, the process o f demobilization and reintegration, and labor intensive public works. The PRSP was endorsed by the Boards o f the Bank and Fundon August 12,2002. 23. For the medium-term, the Government has formulated a private sector-led growth strategy with agriculture and the rural economy as the leading source of growth. The GoR's plan is to continue to increase public investments inthe agriculture sector during the "primary growth phase" from 2002-2006, and to have the private sector play a major role ininvestmentduring the "consolidation phase'' from 2006-2010. A key pillar o f the approach i s the Strategic Plan for Agricultural Transformation (PSTA), which was finalized in 2004 and launched in June 2006. The strategy aims to increase the income o f the vast majority o f people living inrural areas by improving agricultural productivity and facilitating transformation from a subsistence economy to one that i s geared to production for the market (e.g., through the promotion o f non-traditional exports such as horticultural products, pyrethrum, and hides and skins). Moreover, Government views export promotion and the service sector as important sectors for growth, and aims to provide the necessary infrastructure and training support to these sectors. 24. In its Vision 2020 statement, the GoR envisions a transformation from a largely agriculture-based economy to a knowledge- and information-based economy, in order to reach middle-income status by 2020. The government emphasizes its intention to use investment in Information and Communications Technologies (ICT) as the key driver for this transition and as a vehicle for improving service delivery, particularly in the rural areas. In 2000, the government created the Rwandan Information and Technology Authority (RITA) to coordinate all ICT investments, and launched the ICT strategy with the first National Information and Communication Infrastructure (NICI) plan, which covered the period 2000-2005. Currently the GoR i s implementingthe N I C I I1plan. Now, all ministries in Kigali have reached some level of office automation, with the Ministries o f Health, Education and Finance being the most developed. Fiber optics link most o f the ministries and some ministries have functioning local area networks (LANs). Key initiatives looking forward include setting up public information kiosks, community electronic information kiosks, anda landrecords information system. 25. Rwanda's progress in establishing an aid coordination, harmonization,and alignment framework is being recognized as international best-practice. The Cabinet has approved an Aid Policy Paper, prepared through an extensive process of consultations involving key stakeholders inRwanda's development, which articulates the 11 government's vision for improved aid management and policies. The Aid Policy aims to increase efficiency and efficacy o f aid in partnership with all in-country donors, in line with the 2005 Paris Declaration on Aid Effectiveness. The policy incorporates many o f the elements from the Paris Declaration, and sets objectives for negotiation and management o f aid that respond to Rwanda's development needs. It clearly outlines the government's commitment, expectations, and preferences regarding the types o f external assistance it solicits, and the process to be adopted in the negotiation and management o f external aid, which includes a much clearer division o f tasks between government institutions and departments. It also provides a basis for attracting increased volumes o f assistance neededinthe medium term for Rwanda to meet its development objectives. C. Implementationof the PRSP2002-05 26. The assessment of progress in implementationof the PRSP is based on the Annual Progress Reports (APRs), the corresponding Bank-Fund Joint Staff Assessments, and other independentassessments. The APRs preparedby the GoR in 2004, 2005 and 2006 provide a fair and candid review o f progress made so far. Implementation o f the PRSP is assessed with respect to overall progress in achieving outcomes, institutional arrangements and governance, monitoring and evaluation arrangements, and donor coordination. These are discussed below. OverallProgress in Outcomes 27. GDP growth has averaged just under 6 percent per year over the period 2002-2005. Periods o f poor and delayed rains led to a growth rate o f 0.9 percent in 2003-the lowest for the period. However, by 2005, growth had recovered to 6 percent due to a good harvest. This led to a reduction in inflation from a high o f 12 percent in 2004 to 7 percent by 2005. However, recent incidence o f drought inthe region indicates that overall GDP growth may fall from 6 percent in 2005 to about 3 percent in 2006. These incidents o f drought or delayed rains, serious power outages in 2003 and 2004, along with increasing world oil prices have been the main factors contributing to these outcomes. 28. While the fiscal programwas broadlyon track in the first half of 2005, there were slippages in the third quarter under the PRGF program. The government restrained expenditures during the first half o f the year to remain in line with the reserve money target. However, some non-concessional debt was contracted to guarantee the lease o f generators purchased due to the electricity crisis. As a result o f these events, the performance criteria on priority spending and non-concessional debt under the PRGF were missed. The domestic fiscal deficit at the end of the third quarter was substantially below the target. 29. Imports continued to be buoyant at the end o f the third quarter o f 2005, while exports were slightlyhigher than programmedmostly drivenby an increase in coffee and coltan prices. Despite a wider current account deficit, higher-than-programmed project disbursementsby donors kept the reserve coverage at close to 6 months of imports. In line with these developments, the nominal and real effective exchange rates rose 12 substantially by about 9 and 15 percent, respectively duringthe first six months o f 2005. Overall, monetary policy was broadly in line with the PRGF program. The end-June performance criteria and end-September indicative targets on reserve money and net foreign assets were met under the 6threview o f the PRGF. 30. In the case of rural development, all APRs noted the lower than expected progress, particularly on agricultural transformation. Among the factors hindering progress towards agricultural transformation are regional and global pressures (including commodity price fluctuations, global value chains and climate change); lack o f differentiation in the development strategy between high and low potential agricultural areas; and lack o f a framework linking priorities to what i s feasible over the short to medium term given institutional capacity and resource constraints. However, there has been recent progress in outlining action plans and within the context o f the policy dialogue with Government, there has been increasing focus on addressing the most constraining factors to production. 31. The APRs reported on progress toward private sector development and export promotion. A one-stop-shop center in the Rwanda Investment and Export Promotion Agency was established to facilitate business development. In 2003, a law that redefined the role o f OCIR-The and OCIR-Cafe (the former commodity marketing boards for tea and coffee) was passed. These organizations now provide extension activities to improve the capacity o f smallholders and facilitate their access to inputs, and are no longer involved in setting prices. So far, three tea factories and Rwandex (the major coffee exporter) have beenprivatized. Inthe financial sector, following the sale o f two government-owned banks, five o f six major commercial banks are now private. Rwandatel (the state telecommunications company) was privatized in June 2005 and the management o f Electrogaz (the main public utility responsible for delivery o f services in water, gas, and electricity) was transferred to a private operator as an initial move toward privatization3. In addition, a multi-sectoral regulatory agency, Rwanda Utilities Regulatory Agency (RUM), was established to oversee the regulatory framework in water, electricity, and telecommunications related to private investment. With regard to trade and regional arrangements, an export promotion strategy and action plan has been developed and an area close to Kigali airport has been designated as an Export Processing Zone. Tax and other incentives are in place to attract foreign investors. Additional reforms undertaken in the area o f private sector development, export promotion, and the financial sector are listed inAnnex 2. Rwandajoined the COMESA Free Trade Area in 2004 and is in the final stages o f the application process to join the East African Community (EAC). 32. In line with the PRSP, Rwanda was successful in reallocating funds to priority areas, while reducingmilitary spending, which has contributed to significant outcomes in the social sectors. Priority spending, as a percent o f GDP, rose from 4.0 percent in 2000 to 7.0 percent in 2004, and i s estimated to have reached 10.1 percent in 2005. More than half o f total priority expenditures have gone to the education and health The Government has not renewed this performance contract and i s now reviewing options for reform o f the utilities sector. 13 sectors. In addition, spending on productive sectors (such as agriculture, export promotion, the Common Development Fund, and infrastructure) has steadily increased over the past few years. Military expenditure, on the other hand, declined from 3.4 percent o f GDP in 2000 to 2.1 percent' in 2005. Significant reductions in military spending since 1999 reflect improvements in the security situation, reduced personnel costs following the demobilization of over 19,000 soldiers, and increased efficiency in the management o fthe RwandaDefense Force. 33. Impressive progress has been made in primary education. The gross enrollment ratio in primary education rose from 71 percent in 1990 to 137 percent in 2005 while net enrollment increased from 66 percent to 93.5 percent, during the same period. The target o f universal primary education by 2015 seems feasible, but the primaryeducation completion rate, which stood at 55 percent in 2005, needs to improve to keep Rwanda on track for the Millennium Development Goals. The enrollment rates, both gross and net, at the secondary level, are quite low at 15.3 percent and 10.4 percent, respectively. The government i s actively tackling these concerns through policy commitments to a fee-free nine-year basic education program, which aims to double the transition rate from primary to secondary school by 2010, and by adopting measures to improve the quality o f education through reforms in teacher training. In addition, to strengthen the curriculum and ensure its implementation, the government established the National Curriculum Development Center and the General Inspectorate o f Education. Furthermore, Parliament passed the Ministry o f Education's new National Science, Technology and Innovation Policy in 2005. This will eventually change curricula at all levels o f education, to support Rwanda's move toward a knowledge-based, technology- led economy. 34. In health, Rwanda's immunizationprogram is considered one of the best in sub-SaharanAfrica with a coverage rate o f 85 percent for DPT3, relatively low attrition rates and limited inequities. Infant and under five mortality have dropped gradually and have now reached pre-genocide levels. However, much more needs to be done. For example, chronic malnutrition affects 45 percent o f children under five. While access to basic health services, including assisted deliveries and family planning, i s improving, the 2005 APR points out that reducing the maternal mortality rate towards the MDG in2015 i s a major challenge for Rwanda due to the high cost o f delivering quality obstetrical services. Inan effort to address these issues, the Ministry o f Health incollaboration with stakeholders has revisedthe Health Sector Strategy (to increase its focus on the problem o f maternal and child mortality), as part o f the process to move towards a sector-wide approach (SWAP). 35. Governmenthas adoptedseveral importanthealthsector reformmeasures to consolidate progress made so far. First, public spending on health has increased substantially in the past few years, and i s facilitating access to a pro- poor package o f care. Second, efforts to expand social protection mechanisms are yielding good results with enrollment rates in micro-insurance schemes (mutuelles) reported to reach over 40 percent o f the population. Third, the new Health Strategy, together with the Poverty Reduction Strategy, represents a sound basis for addressing disparities inhealth outcomes and service provision. Fourth, the government i s scaling up performance based 14 contracting schemes for high impact services and i s implementing a decentralized program for community health at the district level, using performance contracts with local governments. Fifth, the Ministry o f Health, in close collaboration with stakeholders, has developed a reproductive health policy. Finally, innovative schemes are beingpiloted to address the shortage o f human resources, including hardship allowances for work inrural areas. 36. The Gacaca system (community based legal hearings of the detained genocide suspects), approved by the National Assembly in October 2000, is now operational. Between 1997 and 1999, only 2 percent o f the cases o f the over 100,000 detained genocide suspects were resolved under the conventional justice system as prescribed by the Genocide Law and the International Criminal Tribunal for Rwanda (ICTR). At this pace it would take over 100 years to resolve all the cases. Thus, the Gacaca, a traditional form o f conflict resolution based on community participation, was adapted and passed into law to expedite the genocide trials. In 2004, following careful preparations, including the sensitization o f the population and the training of the elected jurors, the Gacaca became operational on a pilot basis; and in 2005, the Gacaca jurisdictions were expanded to cover the whole country. This has resulted in the hearing of 4000 cases. 37. Other efforts to promote peace and reconciliation in Rwanda include: (i)the Genocide Survivors Fund which provides support in education, shelter, health, and income-generating activities to the most vulnerable among the survivors; (ii)the integration o f 15,000 members o f ex-FAR (the former Government army) into the Rwanda Defense Force at various command levels; and (iii) demobilization of 12,900 the ex-FAR members. To date, about three-and-a half million Rwandan refugees have been repatriated and resettled, which i s an impressive record, compared to other post-conflict countries. Moreover, the National Unity and Reconciliation Commission, which was established to consolidate the Government's policy in redressing the legacy o f divisive politics that has been a prominent feature o f Rwanda for many decades, continues to raise public awareness through civic education initiatives (Ingando). 15 Box 1: Summary of AchievementsandKey Issues inthe Implementationof PRSP I Sector Achievements Areas for Improvement Agriculture - the Strategic Plan for Agricultural -Selected lower than expectedprogress in Transformation finalized& 2004 and adopting measuresto improve input launchedin2006 use-ie. water, fertilizer, and seeds Private Sector - one-stop-shopcenter established inthe - further reforms are required(i.e., Development Rwanda Investment andExport updatethe legal andregulatory Promotion Agency - RwandaUtilities fi-ameworkgoverning the fmancial Regulatory Agency and commercial sectors, reforms to -established broadenand strengthenthe pension export promotion strategy and action system) to build asound, deep and plandeveloped - role of OCIR-The and OCIR-Cafe -diversifiedFactoriesto financial sector six Tea be privatized redefied -- three Tea Factoriesprivatized Rwandex (the largest coffee exporter in the country) privatized -two government-ownedbanks privatized - Rwandatel (thetelecommunication Social Sector -company) privatized gross enrollment ratio inprimary school - primary educationcompletion rate -i s at 137%, net enrollment 93% immunization coverage for DPT3 -isgross at 55% secondaryschool enrollment -(diphtheria, pertusis, tetanus) at 85% i s at 15.3%, net enrollment i s at enrollment inmutuelles is over 40% -10.4% chronic malnutritionaffects 45% Public Expenditure MTEF was introduced andrecurrent Management --- the Joint -ofthe development childrenunder 5 Organic Budget Law (OBL) adopted budgetare still separate Monitoring System was - developmentof a well defined -adopted implementation plan to all governmentagencies are usingZero the OBL Balance sub accounts -operationalizeoftasks completion outlined inthe action plan ofthe Country -Procurementofprocurementreform Issue Paper alignment implementedby MINECOFINand by MINALOC InstitutionalArrangementsandGovernance 38. Two o f the most important pillars o f the government's agenda for state transformation involve the broadening o f grassroots participation and government responsiveness. These are to be achieved through decentralization, human resource development and capacity building. These areas o f focus emerged from an analysis o f the political causes o f the genocide and grassroots consultations in preparation o f Vision 16 2020 and subsequent governance framework. As such, they have been adopted as a central element o fthe PRSP. 39. In the area of economic governance, the PRSP was instrumental in improving the budget process and associated institutions. It facilitated the introduction o f the MTEF, which has led to improved budget predictability and a more rational approach to budget preparation, implementation, and monitoring. However, challenges still remain in some sectors where sector strategies and plans are either non- existent or relatively less well developed (notably, the energy sector). There still exist separation between the development and recurrent budget, although the recent restructuring o f CEPEX (which i s now under the Budget Department) i s a positive move toward unifyingthe budget. 40. The APRs highlight the significant progress made in establishing institutionsfor improvedpublic expenditure management. The Organic Law o f State Finances and Assets (i.e,, the Organic Budget Law), which i s expected to modernize the public financial management (PFM) system, was adopted in March 2006. A Public Procurement Code that incorporates the recommendations o f the Country Procurement Issues Paper (June 2004) and complies with international best practices has been adopted by the Council o fMinisters and is currently under discussion inParliament. A system for monitoring budgeted inputs against expenditures (Joint Monitoring System) was introduced in 2003. A Financial Accountability Review and Action Plan was also adopted and a steering committee created to coordinate the implementation o f the action plan. The system o f zero balance account i s operational and all government agencies are now using zero balance sub accounts. Additional reforms undertaken in this area are listed inAnnex 2. In2006, all budget support donors adopted the Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework as the common assessment tool, thereby ensuringno future separate individual assessment o fPFM. 41. Despite the gains in institutional and legal reforms for improved fiduciary arrangements, capacity continues to be a key challenge that affects overall governance in the country. There have simply not been sufficient numbers o f trained staff to meet the high level o f need inthese areas. To better coordinate capacity building interventions, the Multi Sector Capacity BuildingProgram (MSCBP) was developed, and the Human Resource and Institutional Capacity Development Agency (HIDA) was established to coordinate the implementation o f MSCBP. However, concerted efforts are needed to ensure the effective functioning o f HIDA and sound implementation o f MSCBP. The recent needs assessment for public accountants and internal auditors undertaken by MINECOFIN highlighted the insufficient numbers as well as the low capacity of existing accountants and internal auditors. In order to fill the current vacancies, 60 new accountants and internal auditors have been selected to be trained and placed in different Government institutions (Ministries, agencies, provinces, and districts). In addition to these, 50 extra trainees have also been selected to be trained to fill gaps that may arise should there be some attrition. A capacity needs assessment is planned inthe area o fprocurement. 17 42. The APRs also discussed the GoR's continuous effort towards decentralization. The process was deepened in2005 by devolving more responsibilities to sub-national governments and institutions. However, further work will be needed to clearly distinguish between fiscal, administrative, and political decentralization, and to clarify and resolve potential sectoral differences in the transfer o f authority from the central to local governments. As weak administrative capacity i s a major challenge at all levels, and especially at the district level, efforts in the areas o f capacity building and civil service reform are critical. Currently, the Government i s dealing with the issue o f capacity by setting up incentives to encourage central staff to move to rural areas. This i s also part o f the Government's vision to streamline the central ministries. The Government also aims to use the system o f Ubudehe (a traditional Rwandan practice o f working together to solve problems) to develop bottom-up planning and budgeting systems that articulate communities' needs. Donors are also providing support for capacity building, through various trust funds and pooled fund arrangements. MonitoringandEvaluation 43. The PRSP clearly sets out defined roles and responsibilitiesfor the Strategic Planning Unit (formerly the Poverty Observatoire), Statistics Department and the Budget Department. Previously, the Poverty Observatoire focused on elaboration o f a monitoring framework, assisting Ministries with defining indicators, and capacity building to monitor their programs. The Statistics Department focused on gathering economic data while the Budget Department concentrated on monitoring the budget and spending through the budget process. There was limited attention paid to linking spending to outcomes. Currently, however, the recent institutional reforms have ledto the creation o f the National Institute o f Statistics (by merging the former Statistics and Census Departments), and expansion o f the mandate o f the Strategic Planning Unit. The Strategic Planning unit i s now charged with more strategic thinking and planning, particularly the mandate to elaborate a monitoring framework which reflects how spending translates to outcomes. These reforms are expected to facilitate improved coordination among these agencies. 44. However, elaboration of time-bound and monitorable indicators in the originalPRSPdocumentwas limitedin certain key areas. For example, inagriculture and rural development, as well as in infrastructure, the set o f indicators and targets outlined inthe PRSP matrix were inadequate. This was also the case for governance and social inclusion, which was identified as a core area o f focus for the PRSP. Subsequent annual sector reviews and APRs have ledto further elaboration o f monitorable indicators for key sectors, which will be a key area o f focus for the EDPRS. 45. Internal demand for M&E is now beginning to emerge, based on ongoing sensitization and training workshops coordinated by the Strategic Planning Unit. There are increasingly improved data available; the focus should now be on analysis o f these data. For example, MINALOC i s currently engaged in institutionalizing Citizen Report Cards and Community Score Cards to evaluate basic social services in selected provinces. The focus will be on evaluating basic health and education services, as well as 18 other basic social services such as water and sanitation, justice and administrative services. There are also ongoing impact evaluations o f performance-based contracting arrangements in health which will inform the approach to decentralization and service deliveryinthat sector. Donor Coordination 46. To facilitate implementationof PRSP I,the government instituted a cluster group approach which has had mixed results. The objective of the cluster thematic groups i s to facilitate the development and implementationof sector strategies. These clusters are arranged around the main themes o f PRSP I,with the aim o f harmonizing donor support around government priorities. Ln November 2003, a Partnership Framework on Harmonization and Alignment between the government and its budget support donors was established, and the government has increasingly taken ownership o f the process. The government has also restructured its Central Projects Bureau (CEPEX) to facilitate the engagement with the cluster groups andbudget support donors. Progress in donor coordination in the education and health clusters has been significant and recently, the increased capacity o f the Ministryo f Agriculture has contributed to effective partnership with the rural cluster inthe development o f an agriculture strategy. However, limited capacity in the line ministries continues to hamper the work o f other cluster groups. This i s particularly the case for the infrastructure cluster. The recent establishment o f sector working groups (SWGs), in the context of EDPRS preparation is expected to foster the development o f functional clusters inall sectors. Conclusion: OverallAssessment 47. Overall, the Bank and Fund staffs have commended the GoR for its candid assessment of achievements and shortfalls while highlightingthose areas that will needmore focus and strengtheningin Rwanda's second PRSP. The key areas inneed o f attention, as highlighted in the 2006 Bank and Fund Joint Staff Assessment Note (JSAN) o f the PRSP Annual Progress Report include: a) creation o f a sound and overarching macroeconomic framework linked to improved costing and prioritization, and which reflects concerns over debt sustainability; b) continued support toward an enabling environment for private sector development, particularly implementation o f measures to improve productivity; and c) continued improvement inservice delivery. D. Medium-TermOutlooWFutureProspects 48. Accordingto the latestprojections,Rwandawould continueto grow at a rate of 4 to 5 percent over the period 2007-09, assuming the productivity effects from current reforms materialize in two to three years. Inflation is projected to remain around 5 percent, over the period 2006-08. This projection i s founded on a further strengthening o f fiscal policy, the streamlining o f the financial sector and the continued implementation o f prudent monetary policies as recommendedby the IMF. On the fiscal side, total revenue i s expected to reach 14.5 percent o f GDP by end-2008 while a marginal reduction in expenditure i s expected from 28.5 percent in 2005 to 27.5 percent 19 by 2008. The fiscal deficit including grants would be reduced from its level o f 2.3 percent o f GDP in2003, to 0.8 percent by end-2008 (see Table 1). 49. To realize its Vision 2020 targets, however, Rwanda's economy would have to grow at a considerably higher rate. In 2002, the government estimated that, assuming population growth remains at 3 percent; GDP would have to grow by 6-7 percent annually to meet Vision 2020 targets. Duringthe period 2001-05, however, the average growth rate o f GDP was only 5 percent, thus sustained annual growth rates o f GDP o f over 7 percent would be required to achieve the 2020 poverty reduction target. Preliminary results from the Country Economic Memorandum under preparation indicate the primary sources o f growth would be in the agriculture, services, and construction sectors. For growth o f GDP above the current 5 percent, immediate attention would be required on improving infrastructure, particularly in energy, water, and transport, as well as for services that foster productivity improvements inthe agriculture and rural sectors. 50. Agriculture and rural development form the current base of the economy and are key sources of growth, employment and poverty reduction in the short to mediumterm. The production base is predominantly small farms with an average land holding o f 0.7 hectares. Due to rainfall variability and timing, and to a lesser extent, the energy crisis (which has affected export crops), growth in the sector has been less than projected under the PRSP. The government's current strategy in agriculture i s to put increased emphasis on high value added goods, and support the development o f agri- business and agro-processing. An export promotion strategy and an action plan to increase trade have been developed. For the traditional export crops, the government's strategy i s to focus on fully washed, premium coffee, the average price for which i s about twice that o f traditional beans. Donors such as USAID are playing an active role in providing financing, training, fertilizer, and washing stations. Similarly, Rwanda's tea i s considered to be o f the highest quality and prices are three times that for non-premium tea. World prices for tea have been relatively stable and ongoing privatization o f tea factories i s expected to increase production and improve quality. By 2010, tea production i s expected to double from the 2003 level o f 14,300 tons to 28,600 tons. 51. The service sector will continue to be a strong driver of growth in the medium term. Activities in this sector consist o f banking and financial services (8 percent), transport, storage and communication (18 percent), trading (24 percent), rental property (25 percent), and public administration (25 percent). Activities related to deepening the financial sector, particularly micro-finance, have the greatest potential to contribute to growth in services. In this regard, Government i s in the process o f elaborating an action plan for the financial sector based on the results from the Financial Sector Assessment Program. 20 Table 1: Selected Economic Performance Indicators 1996-98 1999-01 2002 2003 2004 2005 2006 2007 2008 Actual Projected IPercent Change ~ G D P I 11.8 I6.8 9.4 0.9 4 6 I 3.0 5.0 4.5 I ~~ ~ 10.7 1.6 2 7.4 12 7 4 4 5 I 14.6 23.1 -10 -12.5 26.8 3.8 10.4 3.4 5.1 Terms of Trade 3.2 -10 -24 3.5 19.5 12.6 -6.3 -3.7 1.5 IGov. Domestic Revenue I 10.1 I 10.3 12.2 13.5 13.9 15.1 I 14.1 14.3 14.5 I 6.5 7.9 7.2 8.1 12 14.1 12.2 9.8 9.0 Overseas Development Assistance 21.3 18.2 20.5 19.7 25.3 NIA 20.3 19.7 21.3 23.9 26.1 28.5 28.1 27.5 27.5 Fiscaldeficit(excl. grants) -10.2 -9.4 -9.1 -10.4 -12.1 -13.4 -13.9 -13.3 -13.0 -3.7 -1.5 -1.9 -2.3 -0.2 0.7 -0.7 -3.6 -4.1 Current Account Balance -7.9 -16.3 -16.6 -19.2 -18.2 -19.4 -21.4 -19.2 -18.2 Exports,GNFS 6.5 7.8 7.7 8.3 10.2 9.3 9.5 10.0 10.1 Imports,GNFS 25.1 24.3 24.5 27.6 28.3 31.4 29.6 29.5 30.0 OfficialReserves(mos. of imports) 4.4 5.9 6.3 5 6.3 6.2 4.9 4.8 4.7 ExternalDebt 1 66.8 I72.3 85.3 93.4 91.9 70.7 I 15.0 18.7 22.1 I Memo Items J ExchangeRateRFR/US$ 307 391 476 538 573 570 580 585 596 GDP (US$million) 1740 1815 1735 1684 1835 2137 2357 2553 2720 Source: Ministryof Finance, WcirldBank and IMFstaff estimates I 21 52. ICT penetrationis expected to stimulate growth in the service sector,though financing remains a major constraintto developmentand expansion.Communication costs are particularly important for international trade and new business/product development. ICT development would on the one hand allow more efficient and equitable participation o f Rwandans in trade, and on the other contribute to diversifying export products and services, as opportunities for higher valueradded ICT products and services become available. Related to this i s the government's strategy to strongly emphasize progress in science and technology, and develop a regional and eventually world comparative advantage in ICT and other science based services. Government i s also interested in developing Science, Technology and Innovation (STI) skills needed to find, adapt and utilize existing technologies to produce knowledge intensive goods and services. These might include rainwater harvesting systems, and new and accessible means o f generating energy, particularly for rural areas. 53. Construction activities will remain a key driver of growth, in turn stimulating investment and trade. The government has simultaneously launched initiatives in labor intensive public works to rebuild and generate employment in urban and rural areas. This work will support the government's plan to improve the road networks (particularly rural roads), which has been identified as a major constraint to trade and competitiveness by the Diagnostic Trade Integrated Study (DTIS). The mining sector is currently under-developed and there is great potential to improve exports. The government will adopt measures to promote increased prospecting, to identify and assess Rwanda's mining resources, as well as encourage foreign investment. This sector also has potential to be a significant source o fnon-farm rural employment. 54. In terms of constraints to growth, the most binding are related to high transport and energy costs, and poor water management. Transport costs, related to the poor state of both international transit and domestic roads, as well as costs arising from procedural obstacles are important issues to be addressed in pursuing regional integration4. The DTIS cites examples o f restrictions to establishing a transport company. These limit growth o f the sector and Rwanda's ability to develop its potential as a transit country. For example, investment in a truck has in most cases to be financed through a bank loan with high interest rates. Second, trucks capable o f operating internationally carry up to 60 tons but due to the weight restrictions cannot be fully utilized. Measures to ease these restrictions would contribute to reducing transport costs, while improving the position o f Rwandan transport companies vis a vis their Kenyan and Tanzanian competitors. In the case of energy costs, it is estimated that industrial electricity charges are two to four times higher in Rwanda than in the neighboring countries o f Kenya, Uganda, and Tanzania. Government action in developing the Lake 4For example, the DTIS gives the example o f poor maintenance on the road between Gitarama and Kibuye which raised vehicle operating costs from a 1989 level of $1.OO per kilometer to almost $3.40 per kilometer in 1996. Rehabilitation o fthe roadresulted ina fall o fmore than 50 percent invehicle operating costs and an overall reduction intransport costs o f about 40 percent. As a result, agricultural surpluses inthe area can now be sold inmarkets throughout the country, and a general shift is taking place from subsistence agriculture to production for the market. 22 Kivu project aims to address the major energy issues related to electricity generation. However, a comprehensive strategy for the sector that i s relevant to the rural context will also be needed. Government has also adopted recent measures (based on the Agriculture Strategic Plan), to invest in rural water infrastructure, and also improve water management, through extension services. 55. Over the medium term, Rwandawill continue to be highly dependent on foreign aid to finance its development. Rwanda reached its HIPC Completion Point in April 2005. Achievement of the HIPC Completion point along with additional debt cancellation under the Multi-lateral Debt Relief Initiative (MDRI), has greatly improved Rwanda's debt indicators. The debt to export ratio that stood at 150 percent at end-2003 was drastically reduced to 58.5 percent at end-2005. However, while debt service payment i s expected to remain manageable at below 8 percent of exports until 2026, the NPV o f debt-to-export ratio would breach the policy-dependent threshold o f 150 percent by 2013. These outcomes indicate that, despite debt relief under the MDRI, Rwanda remains at a high risk o f debt distress, mainly due to its high degree of reliance on external financing and its narrow export base. The DSA also indicates that Rwanda i s highly vulnerable to external shocks. Therefore, going forward, it will be essential to quickly scale up measures to increase productivity and exports, mainly through investment ininfrastructure - especially inenergy, transport, and water, andcontinuingto improve the business climate. In the meantime, however, until there is a fundamental change inRwanda's economic outlook, it would not be prudent for Rwandato borrow on non-concessional terms, unless under some exceptional circumstances. The Bank and the IMF will continue to jointly monitor the public sector borrowing and debt management, including the concessionality o f loans, and assess the impact o f borrowing on debt sustainability. Moreover, the framework, approved by the Board o f the World Bank on July 11, 2006 to deal with potential problems o f free-riding5 by IDA grant-recipient and post-MDRI countries, will facilitate the monitoring o f debt management inRwanda. I1 IMPLEMENTATIONOF THE LAST CAS 56. An assessment of implementation of the last CAS indicates that the Bank's assistance program was relevant to the medium- and long-term strategic development goals of the country. The 2002-2006 CAS was discussed by the Board in November, 2002, and supported the government's first PRSP. Specifically, it supported the Rwandese Government inundertaking key reforms to promote an improvedeconomic environment for growth and continued progress in meeting its targets inthe social sector. Inthis context, the term "free rider' refers to situations inwhich IDA'Sdebt reliefor grants could potentially cross-subsidize lenders that offer non-concessional loans to recipient countries. There is also a potential moral hazardproblem, on the part o f recipient countries, or borrowers. IDA grants and debt relief may introduce an incentive for countries to over-borrow from other creditors, which would force IDA to increase the grant share o f its assistance. Appropriate design o f incentives to recipient countries are therefore needed to address this problem. 23 In addition, the CAS supported the government's effort to establish key institutions related to good governance and improvedservice delivery. A. LendingandNon-LendingServices 57. The CAS outlined three scenarios related to a base case (US$250-317m), along with a high case (US$412m) and a low case (US$80m). The low case scenario represented the amount o f lending commitments that would be consistent with Rwanda's long-term debt sustainability, while the high case was based on the 3 year IDA allocation determined by the IDA performance based resource allocation process. The CAS noted that despite concerns over debt sustainability, a high case scenario was essential as a performance incentive for Rwanda and a signal to development partners for enhanced assistance ifperformance turned out to be exceptional. 58. Actual lending was based on the base case scenario. It included US$lOO million ingrants for the period FY03-05. The eight operations inthe base case focused on the social sectors (mainly education and health), capacity building at local and central levels, economic infrastructure and institutional reforms. Along with the CAS, the Board approved in FY03, an Institutional Reform Credit (IRC) for US$85 million, which focused on reforms o f public expenditure and financial management, along with key reforms to strengthen the private and financial sectors. The MAP (the HIV/AIDSMulti- Sectoral Project, which i s part o f the Bank's Multi-Country Action Plan Against HIV/AIDS inAfrica) was approved in2003 for US$32 million. In FY04, the first PRSC was approved for US$65 million (US$50 million grant and US$15 million credit), along with the Public Sector Capacity Building Project (US$20 million), and the Decentralization and Community Development Project (US$20 million). A credit for an Urgent Electricity Rehabilitation Project (US$25 million) was approved in FY05; and in FY06, the second PRSC (US$55 million), and the Urban Infrastructure and City Management Project (US$20 million) were approved inthe form o f grants. 59. Completed Economic and Sector Work (ESW) have informed policy dialogue, technical assistance, and project preparation. Most of the non-lending services planned were completed, though some were delayed. In FY03, the Public Expenditure Management Review; Education Country Status Report; and Financial Accountability Review and Action Plan (FARAP) were completed. Results from these reports informed preparation o f development policy lending. In particular, the FARAP was instrumental in facilitating donors' move to budget support. The Country Economic Memorandum (CEM), which was planned for FY03 i s currently under preparation6. In FY04, the HIPC Completion Point; Financial Sector Assessment, an analytical paper on Health and Poverty, and the Country Procurement Issues Paper (CPIP) were completed. InFY05, the Education Sector ExpenditureReview andPublic Expenditure Reviewwere conducted. The above analytical work also informed the substantial technical assistance The CEM was delayeddue to the various competingactivitiesthat were indemandandnecessaryfor scaling up Bank assistanceandthe movetowardbudget support. Specifically,these pertainedto preparationof the FARAP anda PER. However, duringthe same periodthe 2002 CAS was under preparation, the InstitutionalReformCredit CIRC) was also beingprepared. Inaddition, the Bankprovided support towardpreparationofthe PRSP, whichledto the productionof the first JSAN. 24 provided by the Bank in the preparation o f the first and second PRSCs. There i s also an ongoing impact evaluation o f the performance-based contracting schemes to be finalized by end o f 2007. Annex 5 presents a summary o f all non-lending services provided to Rwanda duringthe CAS period. B. PortfolioManagement 60. As of July 2006, the Rwanda portfolio consisted of eleven projects for a net commitmentof US$292 million or about US$36 per capita'. The sectoral breakdown o f the lendingportfolio reflects the priority areas o f the PRSP and consists o f 15 percent to human development related projects, 25 percent rural development, 29 percent infrastructure and private sector development, and 31 percent economic development. Annex 4 presents the status o f the active portfolio. Over the CAS period, disbursements have been heavily dominated by those from adjustment operations, while most o f the project or investment operations have yet to reach their peak. 61. The implementationprogressof the portfolio has been generally satisfactory (seven projects), with four projects (Regional Trade Facilitation, Competitiveness and Enterprise Development, Public Sector Capacity Building, and Urgent Electricity) rated Moderately Satisfactory (see Annex 4). Rwanda's performance i s above the average for the Africa region. There are currently no projects at risk, and no problem projects inthe portfolio. The disbursement ratio has been steadily improving, and is currently slightly above the average for the Africa Region. The Country Portfolio Performance Review (CPPR) conducted in May 2006 identifiedfour major areas that require urgent attention: institutional arrangements, procurement, fiduciary management, and monitoring and evaluation (M&E), which are discussed below. The CPPR outlines an action plan for addressing the main issues inthese areas. C. What Worked Well andWhat WorkedLess Well 62. Notwithstanding the challenging economic, social and political situation Rwanda has faced, an assessment of the Bank's program shows significant achievementsin a number of areas. The most significant achievement, besides assisting Rwanda to reach the HIPC Completion Point, has been the sustained implementation o f structural reforms and the establishment o f institutions aimed at strengthening good governance. The broad-based national consensus on carrying on the reform program was critical in generating donor support for the implementation o f policy reforms. The Government's continued commitment, coupled with key reform measures undertaken in the financial management and procurement areas have facilitated an increasing move toward budget support. 'These figures do not include the regional East Africa Trade and FacilitationProject which went to the Board inFY06, and which does not count toward Rwanda's IDA allocation. A total o f $15 million i s allocated to trade facilitation activities inRwanda, under the project. 25 Progress in the 2002 CAS MonitoringIndicators 63. Outcomes in the four main thematic areas of the CAS have been, for the most part, positive. The 2002 CAS identified the following key themes and objectives for support: (i) Revitialization o f the rural economy through the provision of social and economic infrastructure and services to promote market-based agriculture, improve productivity and create employment; (ii) Private sector development through support to policy and institutional reforms and infrastructure investments to enhance productivity and competitiveness and create employment; (iii)Human and social development including support to education, health, HIV/AIDs prevention, elimination o f gender disparities, demobilization and reintegration o f ex-combatants. A cross-cutting theme was support to improving the effectiveness o f the public sector through reforms inpublic financial and expenditure management. 64. Key achievements and issues inthese areas are highlightedbelow: 0 Revitalization of the rural economy: Through measures outlined in the Institutional Reform Credit (IRC), the Bank monitored progress toward adoption o f the new Land Law, which was adopted in 2005. In the communities where farmer to farmer extension services are being supported by the Rural Sector Support Project (RSSP), productivity has more than doubled. The Bank also monitored progress inprivatization o f tea factories through the IRC, and provided further financing as well as technical assistance for the process through the Competitiveness and Enterprise Development Project (CEDP). To date, three tea factories have been privatized, out o f a total o f 10. However, privatization o f tea plants, which i s expected to increase rural incomes, has been proceeding slower than expected because o f difficulties in attracting investors (domestic and foreign). Progress inreforms to improve access to credit and finance, and use o f fertilizer and seeds have progressed slowly mainly due to the limited capacity on both the government side, as well as on the part of farmers. A key issue has been putting in place an extension system (which was destroyed during the war), to facilitate dissemination and capacity support to farmers. Recognizing this need, the Bank i s working with other donors in the rural cluster to build support for extension system. Several donors have expressed interest in a basket funding mechanism for extension. 0 Private sector development (PSD): The CEDP has been the Bank's primary instrument of support to this area, providing both financing and technical assistance. IFC has also provided technical assistance, in collaboration with the CEDP to business development and privatization (see Section D below). The Institutional Reform Credit was also used to support and finance reforms related to PSD. These operations supported the privatization o f two banks, and the restructuring o f the state commodity boards for tea and coffee. The policy dialogue facilitated the adoption o f a pricing premium for high quality tea leaves. The operations also supported reforms to the state utility company Electrogaz, and the establishment o f the multi-sectoral regulatory agency RURA. Through the CEDP, support was provided toward the establishment o f a one-stop-shop center 26 in the Rwanda Investment and Export Promotion Agency. As a result o f measures introduced to improve the business climate, Rwanda was noted as an example o f a good reformer inAfrica inthe Doing Business 2006 report. There i s more to be done, however. The Financial Sector Assessment Program (FSAP) that was conducted in2005 identified a number o f areas where further reforms are required (payment systems, pensions, nonbank financial institutions) to build a sound, deep and diversified financial sector that can support private sector growth. a Human and social development: Bank support has been administered through the HIV/MAP, Human Resource Development Project, and the PRSCs. Through the PRSCs, the Bank provided support toward further strengthening sector strategies and costing o f these strategies. In addition, the Bank has provided technical assistance in the tools and methods for costing. In general, Bank assistance has greatly facilitated the move toward a more outcome focused policy implementation. Specifically, technical support was provided toward the development o f capitation (Le. transfer per student) grants in education which has helped to facilitate increased community involvement and accountability in service delivery. In the health sector, the Bank continues to provide support to performance-based contracting schemes. Inaddition, support i s being provided to scale up mutuelles which pool funds from community members for provision o f basic health services at district hospitals. In the water sector, support was provided to develop pilots for direct financing o f district water projects to improve access to reliable, affordable, and sustainable water and sanitation services in rural areas. Consequently, with the support from the Bank and other donors, Government has been able to meet and in some cases surpass most targets, particularly in the area o f education and immunization. The next step in reforms, under the PRSGs, will focus on improving the linkages between the budget, MTEF and outcomes. a Improving the effectiveness of the public financial management and economic governance: The 2002 CAS supported specific measures to put in place key institutions through the IRC and PRSCs. The Organic Law o f State Finances and Assets (Organic Budget Law) has been adopted by Parliament. A Procurement Code that incorporates international best practices has been drafted and i s under discussion in Parliament. The action plan that incorporates the recommendations o f the Country Procurement Issue Paper (June 2004) has been adopted by the government. Supported by the Bank (and in collaboration with DFID and the EU), the government prepared and adopted an action plan to improve financial accountability based on the Financial Accountability Review and Action Plan (FARAP). The Bank also supported the publication o f reports on budget revenue and expenditure in a concise format covering revenue and expenditure outcomes. Since 2003, a `flash report' i s produced on a monthly basis for the priority ministries (health, education, agriculture, and internal affairs). More recent operations - Le., Public Sector Capacity BuildingProject and Decentralization and Community Development Project - have placed greater emphasis on capacity buildingat the central and local government levels, respectively. 27 Table 2: Progress in Core 2002 CAS MonitoringIndicators Theme/Objective CAS Pro1 ss Benchmarks Status Target 2005/ Most Recent Indicators (2000/01) Dates Estimatemate Poverty Focus Growth of GDP 6.7% 6.5% 5.7%* Rateof inflation 3.40% 3.0% 7.1%* Growth of agriculturalvalue added 8.3% 6.5% 4.5%* Percenthouseholds below the povertyline 60.0% 49.0% N/A Budget share for the PRSPpriorities 37.2% 45% 54% Annual Reviewof the PRSP with a Progress Report 2003/2004 2004and2005 Revitalizationof the Adoption of the Land Law by 2004 June 2005 Agriculture and the Privatizationof tea and coffee processing RuralEconomy plants 2004 On-going Proportionof ruraland urbanhouseholdswith access to clean water 52% 57% 57% 2 commercial banks Divestitureof governmentholdingsin the privatizedin Private Sector bankingsector by 2004 2004 Developmentand Ratio o f Non-Performingloans to total loans EmploymentCreation inthe bankingsystem 40%a 20% 13% Privatizationof the telephonesystemand the Rwandatel privatemanagementof the electricity/water privatized utility 2003 2005; Managementof Electrogaz transferredin 2003 Human and Social Development Rateof HIV/AIDS infection 13.7% N/A 3%** Adoption of a strategy for Educationfor All Completedas and the use of SWAP 2003 planned Primaryschool net enrolment 73.3% 80% 91% Transitionrateto secondary education 42% 60% 54%+ % of females enrolled in tertiary education 28% 33% 39%" Infant Mortality Rate (per 1000births) 107 83 86 MaternalMortality Rate(per 100,000 births) 810 608 1071 ContraceptivePrevalenceRate 7.9% N/A 9%+ Access of the poor to healthfacilities 70% 80% OBL submitted 2005 Procurement code submitted Adoption of the Organic Budget Law and the 2006 to Improvementinthe ProcurementCode 2003 Parliament Effectiveness of the Adoption of andprogressinthe FARAP public actions and implementation of the Planto improve 2003 completed governance financial accountability inJuly 2003 Preparationof regular accounts o f government financial operations by 2004 0ngoing - Note: a. The 2002 CAS 2002 to 2005; ** * Average rate in2004 UNAIDS Reporton the GlobalAIDS Epidemic;+ in2002/2003;++ in200312004. Also notethat IWS the ratio of NPL at 30% in 2000. This was ter revisedto 40 ir the period estimatesof indicators for HIViAIDs andmaternalmortality rates havebeenrevisedandmay not be comparableto estimates reportedinthe CAS. The maternalmortality rate may likely be further revisedbasedon the 2005 DHS once the new estimates are available. 28 65. Most of the CAS monitoring indicators were either achieved or surpassed, as shown in Table 2. The main areas that were not completely achieved pertained to GDP growth targets and privatization of tea factories. Table 2 summarizes the status in key indicators monitored under the 2002 CAS. GDP growth averaged 5.7 percent between 2002 and 2005, while the target was 6.5 percent. The decline in agriculture output and serious power shortages during 2004 and 2005 (which would have impacted the manufacturing sector, particularly coffee and tea processing) are the mainreasons for this lower than expected performance. In addition, inflation peaked at 12 percent in 2004, due to highfood and energy prices, before beingcontained at 7 percent in2005. 66. Significant progress was made in the areas of reforms. Government shares were sold intwo commercial banks, the telecommunications company was privatized, the Organic Budget Law was submitted to Parliament in 2004 and has been passed. The Procurement code i s currently being debatedinParliament. The Financial Accountability Review and Action Plan has been completed and implemented. Inthe case o f Electrogaz (the electricity and water utility), the management contract was adopted in 2003. However, the country was plunged into a power shortage shortly after the management contractor took control o f Electrogaz. The power shortage arose from a combination of draught-depleted hydroelectric reservoirs, lack o f investment in new generation, a dilapidated network, and sharp increase in demand. The hightension o f dealing with this situation on top o f rebuilding the utility created a difficult and stressful environment for the management contractor. Consequently, the contract was converted to a consulting contract in early 2006, and a Rwandan management team i s now heading Electrogaz. During this time, with support from the Bank's Urgent Electricity Project, Government added diesel power generation which has nearly eliminated the power shortage, but generation costs are very high, especially with the current record high increases inworld oil prices. As a result, Electrogaz power tariffs have increased to about 24 U S cents/kWh, including VAT. This i s among the highest in the world, and costs will rise further if oil prices continue to increase. In addition, network rehabilitation i s still needed, as well as new generation capacity to displace the high cost o f diesel. The Bank-supported Urgent Electricity Rehabilitation (UER) Project i s financing the highest priority network and generation investments, and a 35 MW power plant based on methane gas from Lake Kivu i s being prepared with Bank and IFC assistance. Government i s also planning to restructure the electricity and water tariffs to provide suitable price signals for conservation while also reducing the burden of adjustment on the smaller/poorer customers. 67. Progress was less than targeted in the preparation of regular accounts of government financial operations. The mainconstraint to achieving this target has been tied to the extremely low level o f capacity in public accounting and auditing. Recognizing this gap, the Bank (through the Public Sector Capacity BuildingProject) i s supporting Government's plan to train public accountants, which are sorely lacking in Ministries. Government has completed a needs assessment and strategy for strengthening capacity which has been discussed with donors. The Bank has assisted in establishing a basket funding mechanism to finance the strategy. 29 Use of BankInstruments 68. Overall, the Bank has been flexible in adapting its instruments to support Governmentneeds. First, the Bank has responded to the government's request to move increasingly to budget support, by increasing the relative allocation o f IDA resources to this instrument. Second, the Bank has been able to respond by increasing the amount o f PRSC I,as well as fast tracking preparation o f both PRSC Iand I1when other partners were unable to disburse their commitments and the government could not cover its financial gap. Similarly, the Bank has been responsive to Government's concerns in project implementation, by redesigning the projects to be better tailored to the country's capacity. This has been particularly the case for demand-driven projects where local capacity has been a bottleneck, such as was the case in the Rural Sector Support Project and the Rural Water Supply and SanitationProject. 69. The Bank's aid delivery mechanismwas appropriate during the 2002 CAS period. Through its policy dialogue and CAS instruments - particularly the IRC, PRSCs, and the CEDP - the Bank helped establish clear intermediate targets and action plans to support the implementation o f the PRSP in key sectors. The Bank's support focused on reforms to: i) improve the overall environment for growth and private sector development; ii)broaden participation and capacity in the development o f sector strategies; iii)strengthen the links between sector strategies and the medium-term expenditure framework and overall public expenditure and financial management. 70. The Bank has made a major contribution toward donor coordination and harmonization. The preparation o f the PRSC-1 helped to generate momentum, which led to a govemment-proposed menu o f actions to initiate donor dialogue on a more comprehensive harmonization framework. The PRSC also facilitated the development o f a calendar to align future donor reviews and support with the government's PRSP and Budget cycles. Moreover, donors and Government worked in partnership on the development o f sector strategies and MTEFs, which have served as a basis for the move toward SWAPSwith harmonized features. This provided further impetus to the harmonization process by facilitating dialogue and new harmonization initiatives'. A bi- annual joint budget review, (with donor participation), i s now institutionalized and aligned with the budget preparation cycle. There are also sector reviews which inform the joint budgetreview. More recently, GoR and donors agreed to ajoint public financial management review which would focus on progress in public financial management reforms, priority actions for the coming year as well as goals for the medium-term. This would greatly facilitate the increased move to budget support by donors. * MINECOFIN and the UN Resident Coordinator co-chair monthly Development Partners Coordination Group (DPCG) meetings. The DPCG is the largest donor coordination body. It has been effective primarily in information sharing and general contacts with Government, and increasingly on issues related to NEPAD and global issues relevant to Rwanda. 30 71. The Bank has also supported the use of joint analyticalwork. The Financial Accountability Review and Action Plan (FARAP) was initially supported by the World Bank and DFID. The EU later headed efforts to work toward implementation o f the action plan. The Bank adopted the FARAP and its action plan, supplemented by other available diagnostic work, to fulfill the fiduciary requirements for budget support. Thus, a separate CFAA was not necessary. In the case o f the Country Procurement Issues Paper (CPIP), instead o f mobilizing separate resources, donors decided to rely on the Bank's comparative advantage in this area, consultations during the assessment, and on sharing final results. 72. The Bank is harmonizing its project implementation processes and collaborating more closely with other donors to strengthen its support to Government. For example, the World Bank financed Multi-sector HIV/AIDS project (MAP) and the Global AIDS Fundare usingthe same project implementation unit. The MAP has now harmonized its anti-retroviral procurement procedures with those of the National Tender Board and the Global Fund unit. In addition, collaboration with other donors has been enhanced through secondments o f staff from other donor agencies to the Bank office in Kigali. The secondment o f a rural development specialist from DFID to the Bank has led to substantial progress in the sector. These collaborations have also helpedto leverage Bank resources. 73. Areas that worked less well have to do, mainly, with issues related to the design of demand driven projects. Project supervision reports suggest that project design needed to be better aligned with capacity on the ground. Specifically, in those projects (or components o f projects) that were designed to be demand driven, the degree o f institutional and human capacity building required to enable communities to come together, engage in a participatory process to identify common needs, and prioritize among those needs was sometimes underestimated. Improved understanding o f the situation has led to the simplification and streamlining o f project design, for example in the rural sector support project and the water and sanitation project. A key lesson learned i s that for the next CAS, institutional assessments should pay greater attention to identifying the means to increase the capacity o f local communities to engage in the process. In addition, it i s recommended that the next CAS explore various means o f working in partnership with Project Implementation units to strengthen institutional and human capacity on the ground. 74. Procurement capacity remains one of the major challenges to project implementation. Despite a continuous improvement of the overall capacity o f procurement specialists inBank-financedprojects, the number o fpeople who have a deep understanding o f the procurement rules i s still very limited. Decision makers as well as project managers are not always well informed o f the best practices and generally accepted rules inprocurement. As a result, procurement specialists have the difficult task o f ensuring that at the technical level procurement o f goods, works and services i s made incompliance with the rules set inproject documents. They also have the difficult task o f convincing decision makers that there i s no other option than following the rules. One o f the conclusions from the last CPPR i s that the Bank must continue buildingcapacity at the technical level (procurement specialists and assistants) but also at the decision 31 makers' level, to ensure procurement rules are not only understood at the technical level but also that the rules are integratedinthe management ofBank-financed projects. 75, The procurement reform program has also experienced significant implementation difficulties arising mainly from a weak leadership and loose coordination between ministries in charge o f implementing reforms. Despite government's stated commitment to the public procurement reform process, implementation has been slow. Parliament has not yet adopted the procurement code which is still being debated in the Lower House o f Parliament. There also has not been sufficient engagement o f the key implementing Ministries (MINECOFIN, MINALOC and MINIJUST) and o f the National Tender Board (NTB). The recent decision o f the Minister o f Finance to revive the Procurement Reform Task Force and the appointment o f one o f his advisors to lead the team as well as the inclusion o f the NTB Executive Secretary should give a new impetus to the program. 76. Overall, Monitoring and Evaluation (M&E) arrangements should be strengthened under the upcoming CAS. A review o f the M&E arrangements found that there was insufficient attention paid to assessing the capacity o f implementing agencies to adequately monitor and evaluate projects on a systematic basis. In a number o f cases, there was a lack o f adequate baseline data, and many o f the CAS instruments had performance indicators which were output focused, as opposed to outcome focused. Bank resources and technical experts will be used to address this issue during implementation o f the I S Nand also inthe upcomingCAS. 77. The current state of energy and water infrastructurein the country suggests that there should have been more attention to this sector. General neglect of the energy sector has contributed to the recent energy crisis. Rwanda is currently facing three major energy issues: (i) recurrent power shortage brought on by strong demand growth coupled with rising oil prices, unexpectedly low hydropower reservoir levels, and a dilapidated network; (ii) wood-fuel shortage; and (iii) cost o f petroleum fuels. The high recently launched Urgent Electricity Rehabilitation Project i s designed to address the most pressing issues in electricity generation. Following the Strategic Sectoral, Social and Environmental Assessment conducted to review options for regional power development in the Nile Equatorial Lakes countries, Rwanda, Burundi, and Tanzania have signed a Joint Project Development Agreement for the Regional Rusumo Falls Hydroelectric and Multipurpose Project, for which the financial support o f the Bank has been requested. In addition to these efforts, a strategy for broad support to developing alternative sources o f energy, particularly related to rural energy will be needed. Assistance toward developing such a strategy will be provided under the PRSG. In the case of transport, a Transport Sector Development project i s currently under preparation. D. IFC&MIGA 78. IFC involvement in Rwanda has been limited so far, though its presence is now beingscaled up. For most o fthe CAS period, IFC, incollaborationwith the Bank's Competitiveness and Enterprise Development Project, focused on technical assistance related to privatization, small- and medium-enterprise (SMEs), and the financial and 32 industrial sectors. Rwanda i s one o f six African countries selected for a special review o f the potential o f its SME sector. A study is being undertaken to identify promising prospects for smaller IFC investments. This initiative i s in its early stages. IFC, jointly with the PSD Department o f the Bank and the Development Marketplace, has supported the design and implementation o f a business plan competition in Rwanda, through a collaborative effort with the private sector federation and the Rwanda Development Bank. The first cycle o f the competition i s under completion and the design o f the second cycle has been initiated. 79. MIGA's effort in Rwanda has complemented the Bank Group's strategy o f accelerating private sector-led growth inthe country. Inthis respect, MIGA undertook an assessment to assist Rwanda in creating a national investment and trade promotion capability in consultation with the Bank's departments, and recommendations were made on the proposed Rwanda Investment Authority. This led to establishment o f the Rwanda Investment and Export Promotion Agency (RIEPA, formerly the Rwanda Investment Promotion Agency). Furthermore, prospects for the country to attract foreign investment over the medium to long term were reviewed. 111. THE PROPOSEDBANK GROUPINTERIM STRATEGY 80. The proposedInterim Strategy will bridge the period between the current CAS 2002-06 and the next CAS 2008-12, which is expected to be presentedto the Boardin FY08. The I S Nwill consolidate the results o fthe 2002 CAS while aligning the Bank's strategy to Rwanda's second full PRSP, named the Economic Development and Poverty Reduction Strategy (EDPRS)9. 81. This ISN takes into account key issues arising from initial consultations on the EDPRS. During the CAS period, Rwanda has made considerable progress in the reform o f the economy and the implementation o f the PRSP, supported by a series o f poverty reduction creditdgrants by the Bank, with increased partnershipwithin the donor community. There was significant progress in social sector policies, performance and outcomes. However, growth has continued to average about 5 percent per annum, and i s below the pace required to meet the poverty reduction goals o f the PRSP and meet the MDG target of 25 percent poverty incidence by 2015. Poor infrastructure, particularly energy, water and transport has constrained private investment and productivity. Also, capacity has remained a major constraint to the implementation o f development and governance related programs, particularly at decentralized levels. 82. The strategic elements of the I S N include:(i) increasing the focus on economic growth and on capacity building to strengthen preparation and implementation o f development and governance programs; (ii) consolidating the results o f the current CAS Based on current discussions with the Government, it i s expected that the EDPRS will continue to focus on the key areas o f the current PRSP while placing a much greater, stronger and multi-sectoral emphasis on those areas directly related to growth, i.e. productive sectors, export promotion, basic infrastructure, in particular, energy, rural roads and water and capacity building 33 by sustaining the gains made in the social sectors and improving public financial management; and (iii) further improving coordination andharmonization of development assistance across donors to improve aid effectiveness and reduce transaction costs for Government. The strategic thrust o f the I S N i s in line with the key areas o f the Africa Action Plan. The expected contribution o f the Bank's lending instruments toward supporting these areas are outlined below. 83. The Bank aims to scale up its assistance in the productivesectors in linewith the expected growth focus of the EDPRS. However, while Rwanda is a country that can absorb substantially more aid than i s beingmade available to it from IDA resources, (as derived from the performance based allocation system), prioritization and selectivity o f activities for IDA support remains essential for the period covered by the ISN. Given the critical need for investment in infrastructure to accelerate growth, the Bank will support the following projects: (a) Transport Sector Development (US$10 million) which will adopt a SWAP approach to support the rehabilitation and maintenance o f Rwanda's road network, while also strengthening capacity in the transport sector; (b) Lake Kivu Methane-to Power (US$3.75 million), which will complement IFC's investment in the Lake KivuMethane-Gas Project, and aim to promote public-private partnerships through the provision o f a guarantee for the project; (c) the E-Rwanda lo (US$lO million), which aims to improve the efficiency and effectiveness o f internal government processes through strengthening the management information system, and also through supporting the establishment o f public access points to improve citizen's access to information on government programs. The project will also provide support to improving the regulatory and institutional framework for the implementation o f reforms related to ICT; and (d) the PRSG series which will support implementation o f key policy reforms identified in the recently completed Export Promotion Action Plan, and the Diagnostic Trade Integrated Study. The PRSG will also support technical assistance toward the development o f a financial sector action plan based on the results from the Financial Sector Assessment Program, which was recently completedjointly with the Fund. IFC will complement this effort with continued technical assistance to SMEs for business development (as described insection C below). 84. In addition to the above operations,other priority projects will be presented to the Board should more resource become available. These prioritized projects include a follow-up to the Rural Sector Support Project (RSSP), as well as the National Water Resources Management (NWRM), which is currently under preparation' '. The RSSP will continue to support rehabilitation o f marshlands, while the NWRM will support reforms to improve pipedwater to rural areas. lo its In Vision 2020 statement, the government emphasizes its intentionto use investment inICT as the key driver for transformation from a largely agriculture-based economy to a knowledge and information based economy and as a vehicle for improving the delivery o f public and private services, particularly inthe rural areas. InJune 2005, the GoR approached the Bank to fund an eRwanda Project, as a subset o f phase two o f the National Informationand Communication Infrastructure (NICI 11)Plan. The project focuses primarily on e-Government, including improvements in the financial management, content management, citizen's services, and internal government infrastructure. " additionalresourcesdonotbecomeavailable duringtheISNperiod, theseprojectswillbeprogrammed If inthe upcoming CAS. 34 85. Given Rwanda is a land-locked country, the Bank will also continue to support regional initiatives to facilitate improved economic ties and cooperation across countries, in the region. Lendingto support improvements in infrastructure will also be complementedby ongoing projects inregional trade facilitation (see Annex 4). In FY06, the Bank approved the East Africa Trade and Transport Facilitation Project (US$15 million grant to GoR), to improve import/export traffic flows and ease Rwanda's accession to the East African Community. The Regional Rusumo Falls Hydroelectric and Multipurpose project will be considered for Bank support in the upcoming CAS. Finally, IFC i s also applying a regional approach to support business development and strengthening o f the financial sector. Specific activities being considered by IFC are outlined below. 86. The Bank will also continue its support to improved social service delivery through PRSC/G I11 and lV (US$55 million, US$50 million and US$50 million, respectively) in FY07 and FY08. The focus o f the PRSG series will continue to support policy reforms and implementation focused on the education, health, water, and energy sectors. Support to the reform program will focus on: (a) strengthening the basis for private sector-led economic growth, through agricultural transformation, promotion o f exports, and supporting reforms to deepen the financial sector; (b) strengthening the results orientation o f the MTEF, both at the macro and sectoral levels, particularly in education, health, water, and energy, including strengthening the linkages between the budget and the MTEF, and expanding perfonnance-based contracting o f services; and (c) continued support to improved governance and transparency, particularly through support to institutional and regulatory reforms to strengthen capacity in public financial management and procurement, including at the decentralized levels Specifically, the Bank will support reforms to revise the budget classification system to improve the alignment o f plans at the decentralized level with the budget and MTEF. Finally, in the health sector, during FY07, the MAP project, which has been providing care to HIV/AIDs patients, will be supplemented (by an additional US$lO million), since funds are disbursing quicker than was planned at project design. If more resources become available a Malaria Booster project will also be included. 87. Support to capacity building will continue through ongoing Public Sector Capacity Building Project (PSCBP), which is focused on building capacity of core ministerialfunctionsthroughtechnicalassistance and training. Inaddition, the Bank will continue to provide both technical and capacity support to the implementation o f policy and institutional reforms, particularly in the area o f procurement. The priority areas o f the project include procurement, financial management, M&E, and buildingthe necessary capacity for ministries to effectively deliver on the PRSP (Le., strategic planning, human resource management and incentive structures, ICT equipment use and maintenance). The PSCBP's interventions to ministerial ICT functions as well as ICT policies and standards are laying the foundations for e-government to be supported by the Bank's E-Rwanda project planned for FY07. Complementing the work being undertaken under the PSCBP at the central level, the Decentralization and Community Development Project will continue to support the decentralization process by, among other things, pooling resources and technical experts to train, and build capacity of local government administration and communities to manage service delivery and the development 35 planning process locally. In addition to PSCBP and the DCDP, support for capacity buildingwill also beprovidedthrough the PRSGs and E-Rwandaproject. 88. The I S N will draw on the Africa Action Plan (AAP) framework, which outlineshow all developmentpartners, includingthe Bank, will work in partnership with Governments to help every African country reach as many of the MDGs as possible by 2015. The AAP provides a menu o f options and opportunities to be translated into country specific and regional work programs12. In addition, the Capacity Development in Africa: Management Action Plan elaborates the AAP framework for Bank support to capacity building in Africa. This framework will inform the Bank's assistance to Rwanda, as well as define the results monitoring framework. Table 3 below identifies the priority actions linked to the AAP that the Bank will undertake during the interimstrategy period. "These actions focus on the following main areas: (i) Results; (ii)Buildingcapable states and improving governance; (iii) Supporting the drivers o f growth ininfrastructure; (iv) Buildingcapacity to participate in and benefit from growth and (v) Strengthening the impact o f partnerships, through increased country level engagement and scaling up progress toward achieving the MDGs through effective use of aid, including higher levels o f aid, beyond current levels ina way that multiplies impact. 36 Table 3: LinksbetweenAAP and the Interim StrategyProposedOperations/AAA AAP Focus Areas New / OngoingBankOperations/AAA Results: the framework for achieving impact Poverty Reduction Support CredidGrant through country driven and owned national (PRSCIG 111, IV) aligned with PRSP and development strategies. developed inpartnership with other budget support donors Buildingcapable states and improving governance Private Sector Capacity Building Project, for Public Expenditure Management and service Decentralization and Community delivery Development Project, PRSG 111-IV,E- Rwanda, PER Supporting the drivers o f growth in infrastructure; Transport Sector Development Project; regional integration; buildingskills for growth and EACTrade and Transport Facilitation competitiveness; strengthening agriculture, Project; E-Rwanda; connecting the poor to markets; building a vibrant Lake Kivu Methane-to-Power Guarantee; private sector Country Economic Memorandum; Agriculture Policy Note; Investment Climate Assessment; Building capacity to participate inand benefit from PRSC I11and IV, M A P Supplemental, growth through scaling up human development EducationCSR update, Health CSR indicators, particularly in education and health Strengthening the impact o f partnerships through Joint Results-Based CAS, PRSG increased country level engagement and scaling up progress to MDGs to use aid effectively inthe Continued support to SWAps areas o f economic growth; human development and poverty reduction; and for using increases in assistance beyond current levels ina way that Continued engagement inbudget support multiplies impact. harmonization A. IDA AllocationandInstruments 89. Rwanda's IDA allocationfor FY07 is SDR51.5 million(approximatelyUS$75 million), with an indicative allocation for N O S of SDR39.9 million (approximately US$58 million), adjusted for FY06 frontloading, grants-related discount and the MDRI netting out mechanism. However, an additional 30 percent of the FY08 allocation has been further frontloaded to FY07 given the level o f need, and the importance o f ensuring continued financing to key programs, such as the MAP. This yields a total actual use o f US$83 million in FY07 (and results in a further reduction o f FY08 indicative allocation by US$8 million). The actual allocation for FY08, after adjusting for front loading in the first two years o f IDA14, will depend on several factors: (i) Rwanda's Country Policy and Institutional Assessment (CPIA), which shows the need for improvement particularly in the areas o f public sector management and institutions; (ii) the assessment o f portfolio performance has shown some weaknesses in procurement; (iii) Rwanda's performance relative to other IDA countries (81 altogether); (iv) the amount o f overall resources available to IDA; (v) changes in the list of active 37 IDA-eligible countries; and (vi) the terms (grants or loans) for which Rwanda qualifies underthe low income debt sustainability framework. 90. The CPIA, governance, and portfolio management are the major determining factors of IDA resource allocation, and Rwanda could potentially increase its allocation by improving its ratings in these areas. Rwanda's CPIA rating has remained at 3.5 over the last five years, with the exception o f 2004 when it declined to 3.4. Table 4 shows the various areas in which implementation o f reforms and results on the ground could lead to a higher CPIA score. These include improvements inpublic sector management, especially in debt policy management; streamlining and reducing costs of customs procedures. Moreover, better portfolio performance i s particularly important in improving the overall policy and institutional framework. A higher annual IDA allocation couldpotentiallybe achieved dependingon the overall resource envelope, and the country's relative performance. In the event that the policy, institutional and fiduciary conditions for budget support or investment lending are deemed inadequate to support effective project implementation, IDA resources could be reduced or the mix o f operations could be changed. Table 4: CPIA and Portfolio Management:Areas for Improvement Macro-economic 0 Streamlining and reduced costs o f customs procedures Management and 0 Reducedcost and time for business start-up Structural Policies 0 Elaboration o f a strategy and action plan for the energy sector Adoption o f an energy sector strategy and action plan 0 Adoption o f specific measures to improve water management, particularly inrural areas 0 Improved debt policy management Social Services 0 Increased transitionrate to secondary education 0 Reduced pupil-teacher ratio 0 Elaboration o f a populationpolicy Public Sector Management 0 Adoption o f financial sector action plan and Institutions 0 Improved supervision o f micro finance institutions 0 Adoption o f capacity buildingaction plan for procurement 0 Improvedefficiency o f public financial management 0 Improvedefficiency o f procurementplanning and execution 0 Improvedlinksbetween budget and outcomes Portfolio Management 0 Zero project with unsatisfactory Implementation Performance and Development Objective ratings 0 Satisfactory compliance with procurementprocedures 38 91. Table 5 below presents the lending program for FY07-FY08. During this period, this interim strategy will support PRSG I11and PRSG IV, each for an amount o f US$50 million. The PRSGs will continue to support the key areas o f the PRSP while specific operations continue to support related investments and capacity building needs. Four operations (inaddition to the PRSGs) will form the basis o f Bank support during the transition period: (i)Transport Sector Development p r ~ j e c t ' ~(ii) eRwanda project; a ; an (iii)the LakeKivuMethane-to-PowerGuarantee; andiv) theMAP Supplemental. In addition, there will be greater focus on regional initiatives related to the transport corridor, electricity and water, and trade facilitation. Table 5: ProposedLendinginthe InterimPeriod(US%millions) IDAAllocation I FY2007 FY2008 PRSG 111. IV 50 50 Note: Supportwill also be forthcomingfrom IDA'Sportion ofthe MDRIwhich will provideadditional resourcesthat otherwise would have gone to interest payments. B. Non-lending Services 92. In line with this ISN's strategic focus, the Bank's non-lending services Le., - analytical, advisory, and economic and sector work (ESW) - will support efforts to accelerate growth, build capacity, and improve social service delivery. To strengthen the knowledge base on the sources o f growth and as input to the EDPRS, a Country Economic Memorandum will be completed, along with an Agriculture Policy Note, and an Investment Climate Assessment. Inaddition, a Science, Technology and Innovation needs Assessment will support the Government's vision in this area. Also planned is a Public Expenditure Review (PER), that will focus on issues related to decentralization and public expenditure management. Building on the FARAP, the PER will help highlightareas that needimmediate attention interms o fcapacitybuilding,particularly in the context o f decentralization. Also related to the issue o f capacity, the Bank will support the Government in the implementation o f an ambitious procurement reform program which includes: (a) the modernization o f the legal and regulatory framework; (b) revamping the institutional framework through the conversion o f the National Tender Board into a regulatory agency and decentralization o f procurement activities to the l3To complement IDA funds, additional resources will be sought from other sources such as trust funds, and the Africa Catalytic Fund for Growth. 39 beneficiaries' level; and (c) the preparation o f a national procurement capacity building program based on an evaluation o f the current expertise and future needs. These activities will be financed under the PSCBP. Moreover, the Bank jointly with the IMF will continue to prepare advisory notes on the EDPRSP. 93. In the area of social services delivery, a Poverty Assessment will help monitor progress in poverty and social development. Given the changing context o f the country due to decentralizationand civil service reform, there will be a needto update the country status reports for education and health. 1 Table 6: InterimStrategy PlannedKey Non-Lending Services Fiscal year Products 2007 Country Economic Memorandum Agriculture Policy Note InvestmentClimate Assessment Science Technology and Innovationneeds Assessment Poverty Assessment 2008 Health CSR Public Expenditure Review Education CSR update C. IFC & MIGA 94. With the aim o f creating further investment opportunities in the Great Lakes Region and to allow the countries to benefit from economies o f scale, the IFC i s taking a regional approach while at the same time exploring investment opportunities. Operations under consideration are the following: 0 Infrastructure - Energy: IFC i s seriously considering investing in the Lake Kivu project. It i s exploring the possibility o f participating in the financing o f Kibuye Power Ltd (a Lake Kivu Methane Gas Project) under concession to Dane Associates with Wartsila as a technical partner. Project cost i s estimated at US$72 million and IFC may invest up to US$18 million inthe project. 0 Infrastructure - Logistics: Intraspeed SA Rwanda Ltd (ISARL) i s a major fieight and forwarding company operating in the Great Lakes Region o f Eastern Africa. The company is involved in bulk haulage of containerized general cargo and liquid cargo from the major ports o f Mombasa, Dar-salaam, Tanga, and Mtwara to Kenya, Mozambique and the land locked destination countries of, Uganda, Rwanda, DR Congo, Tanzania, Burundi, Zambia and Malawi. IFC may invest up to US$ 10 millionto assist the upgrade and expansion o f ISARL's freight hauling capabilities. 40 0 Financial Sector: Rwanda completed the privatization o f its financial sector, with the sale o f Government's shares inthe Banque Commerciale du Rwanda (BCR) to the UK-based Actis Group and the Banque Continental African (BACAR) to Kenya-based FINA Bank. IFC i s exploring opportunities for long term credit lines and trade finance facilities to these banks to improve access to finance o f SME.In the medium term, there will be a strong role for IFC in the development of the financial sector. 0 Tourism Sector: Rwanda i s developing a cluster o f good-quality hotels and may require IFC's assistance for long term financing. IFC has also been asked to help identify potential investors that may be interested inbuyingHotel Intercontinental inKigali andthe KivuSunHotelinKibuye. 95. In addition, IFC's advisory and technical assistance role is expected to continueto center on the promotionof the privatesector, including, coordinatingwith the PRSG series and the CEDP to establish a sound enabling environment and the development o f the financial sector. Inthis respect, the IFC i s working with the Rwanda Development Bank to develop leasing in Rwanda. Initial support consists of: (i) assisting with the review o f the leasing code completed in October 2005; and (ii) contributing to a leasing financing feasibility study. Based on the outcome o f the feasibility study, a longer term leasing development program, comparable to the one currently underway in Tanzania, could be in place inRwanda by the fall o f 2006. Also, the IFC has offered, and i s likely to provide advisory services to the Government o f Rwanda on the privatization o f Rwanda Air. 96. The IFC proposes to develop entrepreneurship in Rwanda. The program would address the needs o f existing SMEs to expand their businesses, but also the needs of potential entrepreneurs. Working with institutions such as the private sector federation and business schools, the program proposes to: build capacity for business service providers; support vocational business skills development; and build capacity for entrepreneurship development and training in business schools and private sector institutions. The IFC would approach interested donors for joint support o f these activities, and it i s expected that the program would be inplace inthe latter part o f 2006. 97. MIGA plays an important role in countries previously affected by conflict, such as Rwanda, by trying to mitigate the image o f war-torn countries. This image, whether reflected in the high cost o f doing business or other negative perceptions, i s the primary issue that MIGA's services seek to address. These services include technical assistance to Governments and investment promotion intermediaries and to non-commercial risk insurance programs, which provide risk mitigation and the facilitation o f financial instruments, especially in post-conflict countries where other insurers are often not willing to go. Inthis respect, Rwanda continues to remain eligible for guarantee support in order to accelerate the recovery o f the private sector and increase FDIto the country. In particular, MIGA's focus is on the infrastructure sector. Currently, the agency is exploring opportunities inthe power and telecommunication sectors. 41 D. Donor Roles and Coordination 98. In implementing the interim strategy, the Bank will continue to collaborate with other key donors to generate synergies and to promote increased coordination and harmonization. Inthe area o f growth, the Bank will focus on continued support to improved trade and customs facilitation, in collaboration with DFID, EU and other donors to implement the actions identified in the DTIS policy matrix. A sector wide approach (SWAP) for transport i s currently under preparation by the Bank along with EU, AfDB, andthe government. These three donors now hold at least onejoint mission a year markedby ajoint aide-memoire. The Bank will also continue its close collaboration with a number o f donors in the energy sector, including: (a) the Nordic Development Fund, which is co-financing the Bank-supported Urgent Electricity Rehabilitation Project; (b) SIDA, Norad, and AfDB which are participating together with the Bank in the preparation o f the Rusumo Falls project; (c) EU, which i s leading the sector dialogue on infrastructure as a whole, while the Bank leads the energy dialogue; (d) UNIDO, which i s supporting development o f village-based mini-hydrosystems that are setting the stage for a programmatic approach to these systems under the Bank's Urgent Electricity Rehabilitation project. 99. In social service delivery, sector wide approaches with harmonized features in education, health and water are being adopted. In the education sector, there has been a significant move toward a SWAP approach, supported by DffD, World Bank, UNICEF, EU, AfDB, Sweden, Netherlands, Germany, Belgium, Wallonie Bruxelles, Japan and the World Food Program. The move toward a SWAP inwater i s being supportedby AfDB, EU, World Bank, Belgium, Germany, Netherlands, Japan, and UK. Sector coordination and donor harmonization i s being improved with joint periodic reviews o f the sector performance and substantial progress towards a common implementation framework (e.g., project implementation units o f the Bank and AfDB financed projects have merged and work with the same procedures). Rwanda i s one o f the best examples o f coordination in HIV/AIDS, particularly among the Global Fund, US (PEPFAR initiative), and the World Bank. In health, the Bank has been collaborating with the EU on PRSC related health reforms and with several partners (including Belgium, US, and GTZ) on the perfonnance contracting approach. Led by MINALOC, the Bank, DfID, and UNDP have been designing a mechanism that would allow development partners to provide coordinated support for MINALOC in implementing social protection policies with an effective and sustainable framework, given the recent rapid moves to decentralize both functions and Ministrystaff. 100. In the case of capacity building, the Government's Multi Sector Capacity Building Program (MSCBP) is providing the overall umbrella program for capacity buildinginthe country. To date, four donors contribute to financing ofthe MSCBP: IDA through its Public Sector Capacity Building Project (PSCBP) and the Africa Capacity Building Foundation; the EU and UK are contributing to the Public Financial Management Reform agenda through the co-financing o f a multi donor trust fund to PSCBP. Similar arrangements to support capacity building in procurement are also foreseen, although these are at an early stage. In building capacity at the sub-national level, the Bank will continue to work through the SWAP to support decentralization. 42 This includes the pooling o f resources and technical experts from various donors to train, and build capacity o f local government administration and communities, to manage service delivery and the development planning process locally. Under this program, the Bank is the lead inthe southern province; GTZ leads inthe eastern province, UNCDF in Northern Province, while the Swiss lead inthe western province. E. Consultations 101. In the context of EDPRSpreparations,consultations have revealedkey areas of focus for the next poverty reductionstrategy and these are reflectedin this ISN. The main areas or issues that arose pertain to the energy crisis and growth, decentralization for improved service delivery and the civil service reform. Concerns o f development partners focused on the issue o f growth and identifying viable sources o f energy to sustain growth. An additional issue raised by development partners related to the need for continued improvement in financial management and procurement to further strengthen economic governance and facilitate the generation o f foreign investment. It was stressed that regional initiatives would be necessary in order to help build on peace and stability inthe region and also provide a market for the economy to grow. 102. In addition, consultations were held with Government, including Parliamentarians, as well as civil society members on the priority areas to be covered in the ISN. A brief summary o f issues that arose from the consultations are included in Annex 8. All agreed on the relevance o f the priority areas identified inthe ISN, although advice was sought from the Bank on what actions the country could take to improve Rwanda's IDA allocation. In addition, three key requests were made; i)civil society representatives identified the need for a labor market study to inform training and an education strategy; ii)Parliament expressed interest in being more engaged in the CAS and EDPRS process and in line with this requested training from the Bank to facilitate their improved understanding o f the CAS process and Bank assistance; iii) Parliamentarians also requested assistance for gender mainstreaming o f government programs. It was agreed that the Bank would explore ways o f addressing these issues in the upcoming CAS. F. MonitoringandEvaluationArrangements 103. The performance indicators and targets for the period covered by this I S N are presentedin Annex 1. The ISN will continue to monitor the key social indicators identified under the 2002 CAS. In addition, it will also continue to monitor progress in the privatization o f tea factories, and it will monitor progress in the production o f the accounts o f government financial operations. In the latter case, the focus will be on monitoring progress in training and hiringo f public accountants in Ministries. Other key indicators that will be monitored are related to the areas o f procurement, public financial management and accountability, capacity to plan and implement policies, rehabilitation o f the internal road network, and the elaboration and adoption o f an energy sector strategy. These are outlined in Annex 1 on performance indicators. Progress against these indicators will be assessed on an ongoing basis through regular consultations with 43 stakeholders. Monitoring o f the quantitative indicators will draw from the rich source o f household data, firm surveys, demographic surveys, and the national accounts. IV. CONSTRAINTS & MANAGINGEXPOSURE 104. Macroeconomicand FinancialInstability:This is rated as an area o f low risk given the Government's track record in macro-economic management, which has been rated as satisfactory over the CAS period. To maintain the low risk, as aid i s scaled up, it will be necessary for Government to continue implementation o f reforms to increase investmentto support growth and productivity 105. Political and Social Risks: While there is a general perception that social tensions still exist in Rwanda, the national reconciliation process i s progressing well and therefore a deterioration inpolitical or social outcomes that will adversely alter the thrust o f the development program and the planned IDA support i s unlikely. However, a continuing risk factor to Rwanda's political and economic stability i s closely linkedto the sustainability o f the efforts toward peace and stability in the Great Lakes Region. These risks can be mitigated by the continued engagement o f the international community in promoting peaceful transitions in neighboring countries and the strong commitment o f the Government o f Rwanda to the regional peace process in collaboration with international organizations, particularly MONUC. The recent improvement in relations between Rwanda and the DRC provides evidence o f declining risk o f tensions in the region but continuing efforts are essential to strengthen and sustain this good relationship. 106. InstitutionalCapacity: The main source o f risk relates to the limited capacity to implement development programs, including those related to PFM and broad governance reforms and the delivery o f services. The recent adoption o f the Organic Budget Law will requireconcerted efforts to accelerate PFMreforms to bringpractices inline with the Organic Law. These reforms should be designed and sequenced to take into account the capacity constraints while fostering capacity development. Through the PSCBP and the PRSG series, the Bank will work with Government to ensure that the sequence o f implementation is well-defined in line with existing action plans and capacity. Continuing reforms o f the civil service will be essential to enhance capacity development. In the area o f Civil Service Reform, where there has been a substantial movement, DFID i s the lead agency and has been working closely with Government on this aspect. Both the Bank and DFID, in close collaboration with Government will continue to manage this risk, inthe context o f the EDPRS and the upcoming Joint CAS. 107. Fiduciaryrisks:These remain significant, particularly at the decentralized level. The risks at decentralized levels will be managed through support for improved coordination between the Office o f the Accountant General and MINALOC, with the provision o f clear instructions to administrative districts on financial reporting and management. Inthe case ofprocurement, some o f the tasks included in the action plan o f the Country Procurement Issue Paper adopted by the Council o f Ministers in 2004 have 44 been completed. The government is now engaged in outlining a detailed roadmap to successfully complete its reform program, which will be supported through the PRSG. Furthermore, decentralization o fprocurement operations at the district level creates a new challenge. In effect, there i s a gap between the reforms implemented by the Ministry o f Finance and reforms implementedby the Ministry of Local Government. To ensure that procurement does not become a bottleneck to national budget execution as well as to project execution, modalities to close the gap and ensure better communication among stakeholders will be detailed in the road map. These efforts, coupled with Bank support shouldhelp mitigate the risks inthis area. 108. ResidualRisks: Other than the above risks, no other risks are foreseen that could derail the implementation o f the I S N in support o f the PRS and preparations for the EDPRS. 45 a P d 2 d t 8 n m o m - 3 d g g z d-lnd- m - l n b Y * d N - d - m l n P 2 0 0 0 0 0 0 o o o o o c 0 0 0 0 0 O O O O ~ O O O O O U N N N 0 0 0 0 0 0 0 ~ 0 0 0 0 0 o o c N N N8 3 N N N N N N N S N N N N N N N P 0 N YU W > 0 E a3 8 a cd F Y$ 0 x rn W Y 3cd .3 w s m 8 0 r- M N 00 v) b W P e, I -.-bf E 3 d? .- m n m 3 3 m m m m n m m E: m m m 2 10 d 2 0 2 3 T 0 10 T 3 N 3 hl m 3 3 . 4 3 n N r, 10 N 2 N 0 m 5P c 3 cd G 4 x n v 3N N m U c c N c v: e N t c c N Cr c m -9 9 9 9 ' : c c i 0 0 0 0 ~ N e pl c pr sc F 5 e, m c 0 c c pr -.-P5a I 4 m m 8 5 e, 4 -5 e, 0 9 m c c 5 c E c UB 2 0 3 6 a, h 0 U V m Q, 3 E U a, .ii 1 Q 4 2P .I - Annex 8: Summaryof in-country StakeholderConsultationsfor the ISN The contents of the draft I S Nwere discussed first with the government o f Rwanda, and with GoR's permission, consultations were heldwith representatives o f the permanent commission o f the Parliament, donors, and civil society including the representation fiom the private sector, some non-governmental organizations, and academic institutions. Overall, stakeholders considered the consultation process to be very productive. Stakeholders appreciated being consulted on the I S N contents. This was particularly the case for the Parliamentarians who stressed their interest to be more closely engaged with both the CAS and EDPRS processes. In particular, the Parliament requested assistance from the Bank on support to increase their understanding and better inform members o f the process for determining Bank assistance to Rwanda. The key issues raised by each group consulted are summarizedbelow: Government o f Rwanda: expressed their concern regardingthe declining trend inthe level o fbudget support; stressed the need to continue support to the agricultural sector and rural development; and expressed concerns regarding sustainability of the MAPproject. Parliament: 0 expressed their particular concern over Rwanda's ranking by the Governance Research Indicator Country Snapshot indicators and asked what the country needs to do to improve performance inthis area; 0 asked for guidance on how Rwanda's IDA allocation could be increased, given . Rwanda's limited ability to borrow; 0 outlined their concern regarding the implementation o f certain projects, particularly in terms o f disbursement rates, andthe needto extendproject closing dates; stressedthe need to ensure that gender aspects are reflected inthe country's programs; 0 sought advice on how to support development o fthe microfinance sector; emphasized the need to improve exports inthe region as well as globally. Bank's role: Parliamentarians suggested the Bank could play a greater role in involving members in the consultation process for the EDPRS and CAS. Members requested assistance or training from the Bank to improve their understanding o f Bank assistance, and the EDPRS process, thereby enriching discussion and debate. Assistance was also requested on ways to promote gender mainstreaming. Private Sector, Civil Society Organizations and Academic Institutions: highlightedthe importance of strengthening the link between all levels of education, from primaryto higher education, was emphasized ifthe Government is to achieve its vision o f a service oriented economy; 55 stressed that higher education and vocational training need to be relevant to the demands o f the labor market; identified the need for a labor market study, that takes into account various growth scenarios, was strongly emphasized; noted in particular, the importance o f the labor market study given that Rwanda will soon join EAC and will need a skilled labor force, which if not developed could undermine its competitiveness; a raised the importance o f research for adapting technology to local conditions was emphasized; a noted that women's economic empowerment and improved access to education, particularly at higher levels, was particularly important; stressed the importance of devising measures to assist youth in starting their own businesses; raised a specific question related to follow-up on the Human Resource Development Project, and whether there was any potential for scaling up this project; questioned the existence o f the critical gap between strategies for growth and private sector development, as it pertains to implementation (participants noted that it i s important to understand why the gap exists and how it can be bridged). a Bank's role: The important role that the Bank can play in facilitating the link between private and public activities to foster public-private partnerships was noted on two levels. First, through facilitating public-private partnerships to ensure the relevance o f education and training for the needs o f the labor market and the private sector. Second, through public-private partnerships which ensure that science and technology, and the related research are adopted in a way that reflects local conditions. They stressed that the key to success o f the process i s relevant and adequate training o f the labor force. Donors: discussed the possible synergies that could be realized from working together with the Economic Commission for Africa on the E-Rwanda investmentproject; and a raisedthe possibility o f increasing support to the environment sector. 56 Annex 9: Rwanda- Joint Fund-WorldBankDebt SustainabilityAnalysis 1. In context of the recently finalized Multilateral Debt Relief Initiative (MDRI) an assessment was undertaken for Rwanda to ascertain the country's eligibility for the debt relief. Rwanda has qualified for MDRIdebt relief because o f its overall satisfactory recent macroeconomic performance,' progress in poverty reduction, and improvements in public expenditure management. Economic growth in 2005 accelerated and inflation declined. Implementation o f Rwanda's poverty reduction strategy has been particularly successful in the social sectors, for example, the primary school net enrolment ratio i s now at 91 percent14and vaccine coverage varies between 80 and 95 percent in most provinces. Inpublic expenditure management, an organic budget law was approved by parliament. Performance in these areas provided assurance that resources made available under the MDRIwill be usedeffectively. 2. This joint DSA concludes that, while the MDRI substantially improves Rwanda'sdebt indicators,the countrywill haveto rely mostly on grants to maintain its debt at sustainable levels. Rwanda's net present value (NPV) o f debt-to exports ratio stood at 58.5 percent at end-2005 and, barring any exogenous shocks or policy reversals, debt-service payments remain manageable at below 8 per cent o f exports over the projection period until 2026. However, the NPV of debt-exports ratio would breach the policy-dependent threshold o f 150percent by 2014, indicating that the country i s at a high risk o fdebt distress beyondthe projection period. 3. This joint DSA was prepared using the Fund-World Bank debt sustainability framework for low-income countries (LICs). The debt data underlying this DSA were updated jointly by the IMF and the World Bank along with information provided by the Rwandese authoritie~.'~The medium-termmacroeconomic framework was broadly agreed with the authorities in the context o f the new PRGF arrangement, which is being considered by the IMFBoardat the same time as this DSA16. l4The completion point trigger was set at 73 percent to be reached in2001. l5Bilateral debt was adjusted to account for the effects o f debt cancellation agreements signed with most Paris Club countries; bilateralagreements are inplace with Austria, Japan, France, and the United States, and those with Canada and the Netherlands are expectedto be signed shortly. Regarding non-Paris Club creditors, China has indicated willingness to cancel all its claims whereas Saudi Arabia and Kuwait stated they were not prepared to deliver further debt relief. Debt owed to Libya and the Abu Dhabi Fundcontinues to be passive. With respect to multilaterals, IDA, the IMF, the AfDF, IFAD and the EIB have providedupdates. l6Inthe case o fthe Bank, this DSA update will be consideredjointly with the InterimStrategyNote. 57 I.RWANDA'S EXTERNAL DEBTSINCE THE COMPLETIONPOINT" LICDSA 4. Rwanda's debt situation is now more favorable than estimatedat the completion point. The completion point LIC DSA (including debt relief provided at the decision point, and the topping up under the HIPC Initiative) projected that the NPV o f debt-to-exports ratio would increase to 140.5 percent at end-2005.18 The current DSA, however, estimates the NPV of debt-to-exports ratio at 58.5 percent in2005, an improvement of over 80 percentage points. 5. The improvement in the debt ratio after the topping up under the HIPC Initiative reflects the full implementation of the MDRI19 and favorable export developments(Text Table 1). The MDRIcontributed 76 percentage points to the reduction, while higher exports led to a further improvement of 12 percentage points. On the latter, actual merchandise and services exports in2005 exceeded completion point projections by 20 percent, largely due to strong export performance in coffee, tea and minerals. While the volume of new borrowing in 2004-05 was higher than anticipated, it had higher concessionality, so that its overall impact was neutral. 11. ExternalDebt SustainabilityAnalysis" 6. The medium-term macroeconomic framework is broadly in line with the one presented at the completion point (Box 1). Most notably, it is based on prudent projections2' for growth and external assistance to highlight Rwanda's vulnerability to exogenous shocks and reduce the risks o f policy errors. However, the proportion o f the fiscal financing gap funded through debt flows was revisedupward to 33 percent (corresponding to the historical average) compared with 17percent assumed at the completion point. 17 `*Appendix Rwanda reachedthe completion point inApril 2005. I1inEBSl05152, March25,2005; and IDAIR2005-0055, March29,2005. l 9The baseline scenario includes MDRIrelief from the IMF, IDA and AfDF. For the IMF, the cutoff and implementation dates are, respectively, end-2004 and January 5, 2006; for IDA, the cutoff and implementation dates are, respectively, end-2003 and July 1, 2006; for the ADF, anticipated cutoff and implementation dates are end-2004 and January 1, 2006 (retroactively). The implementation modalities o f MDRIrelief for the AfDF are based on staffs' assumptions consistent with IDA terms. 20 The LIC DSA methodology differs from the HIPC methodology in a number o f aspects, notably (i) the current year exports are used as denominators for estimating the debt-to-exports ratio rather than the backward looking three-year moving average o f exports; (ii) the use o f the WE0 exchange rate projections instead o f exchange rates at the end o f the base year; and (iii) a 5 percent discount rate instead o f currency specific discount rates. 21 Real GDP growth was o n average 7 percent during the past nine years, reflecting mostly the catch up effect after the genocide. The medium-term growth rates assumed inthis D S A reflect higher investment financed from aid inflows and are consistent with an average ICOR o f 4. Greater efficiency reflected inan increase intotal factor productivity (with a corresponding decrease inthe ICOR) could lead to higher long-term growth rates. 58 Table 2: Policy-Based External Debt Burden Indicators Thresholds l/ Rwanda's ratios 2005 2006-26 21 NPV o fdebt inpercent of: Exports 150 59 153 GDP 40 6 18 Debt service inpercent o f Exports 20 6 4 l/PolicyindicativethresholdsasusedinthejointIMF-WorldBankLICDSAframework for a mediumpolicy performance. The quality o f policies and institutions are measures by the World Bank's CPIA index. 21 Simple average. 7. Under the baseline scenario with full implementationof the MDRI, one critical debt burden indicator would exceed the policy-dependent thresholds (Text Table 2). Rwanda's NPV of debt-to-exports ratio i s projected to rise above 150 percent by 2014 and, remain above the policy-dependent threshold up to 2026. However, with the likely higher share o f IDA loans the baseline would breach the thresholds even earlier. At the same time, however, the NPV o f debt-to-GDP ratio remains well below the threshold throughout the forecast period, while debt service payments continue to be manageable at below 8 percent o f exports. The impact of the H P C and MDRI Initiatives i s apparent with the debt service-to- exports ratio falling from 10.5 percent as at end-2004 to 2.6 percent by end-2006. 8. Shocks to the small export base22would substantiallyworsen Rwanda's NPV of debt-to-exports ratio. If exports were to grow by less than one standard deviation in 2007, Rwanda's NPV o f debt-to-exports ratio would increase to above 200 percent in2008 peaking at over 300 percent in 2018, while staying above the threshold throughout the projection period. Given the substantial fluctuation^^^ in Rwanda's export prices in the last few years, this scenario is comparable to recent history. This is also reflected in the "historical" scenario.24Ifthe key macroeconomic variables remained at historical values, Rwanda would experience a sharp increase in the risk o f debt distress with projected external debt-to-export ratios following an explosive upward path (Chart 1) as the average historical export growth was only 3% percent25. 22 Exports o f goods and services were about 11percent o f GDP in2005. 23 Inthe last ten years, export prices fell sharply in some years (for instance, by more than 20 percent in 1998 and 2001) and increased strongly inothers (for instance, by more than 20 percent in 1997 and 2000). The overall export prices index fell by about 30 percent since 1995. 24 The "historical" scenario i s calculated on the basis o f performance during 1997 to 2004. 25 Historical real growth rates were actually higher than the projected growth rates owing to the catch up effect after the genocide. 59 Box 1. MacroeconomicAssumptions The macroeconomicassumptionsare as follows: RealGDP growthis projectedat 5.5 percentfrom2011 onward (increasinggraduallyfrom 3 percentin2006 ") as growth-enhancingsectoralstrategiestake effect andinvestment inhumancapital(healthand educationsectors) starts to pay off. Specifically, growth i s expectedto be generatedby boostingproductivity inthe agricultureand export sectors (mostlytea andcoffee)by improving water management, controlling soil erosion, intensifyingthe use of fertilizer, integratinglivestockdevelopmentinto landfarming, and enhancingextension services. Inaddition, measuresto facilitatetrade andreducetransaction costs would contributeto export growth.Over the longterm, investmentsininfrastructureandhumancapitalare expectedto boost growthinthe services sector. Per capita GDP is projectedto increasegraduallyfrom 3.2percentin2005 to reach2.7percentby 2021 as the populationis expectedto grow by 2.7percenton averagebetween2004-26. Inflationis projectedto fall to 5 percent in2006 andstay at that levelfromthen onward. Exportsof goods and serviceswould grow at anominalrate of about 9 percentuntil2013 inU.S.dollar terms as the export promotionstrategytakes effect and stabilizethereafterat about 8 percent. Importsof goods and services would increaseby 6 percenton average over the period2005-26,mostlydue to growingdemand for capitalgood imports from the private sector. The primaryfiscal deficit would range from 2 to 4 percent of GDP. Centralgovernment tax revenue would increasefrom 14.1percentof GDP in2005 (excludingone-offrevenue) to 18.4percentof GDP by 2026, mostlyon account of awideningof the tax net to the non-monetizedsector. Non-interestexpenditure would remain relatively stable at about 26 percent of GDP throughout the projectionperiod. The current account deficit (including grants) i s projectedto graduallytightenfrom about 11percentof GDP in 2006 to 3 percentof GDP in2026. Excludinggrants, it is projectedto gradually improve from21 percent of GDP in 2006 to about 6 percentof GDP in2026. Grossborrowing and official grantsareprojectedto decreasegraduallywith gross borrowing onaverage slightly below4 percentof GDP and official grants on average above 7 percent of GDP. Thus, in line with the historical average, two -thirdso f external financing will be in the form of grants. "Thegrowthratein2006reflectspoorrains, whichareexpectedtodepressagriculturalproduction. 111. PublicDebt SustainabilityAnalysis 9. A public debt sustainability analysis was not undertaken since it would not provide any significant additional insights, given that the consolidated domestic debt of the treasury and the National Bank o f Rwanda (NBR) is minor (less than 5 percent o f GDP at end-2005). Preventing an increase in domestic debt and thus a crowding out o f private investment i s a key objective o f the new PRGF arrangement. To this end, there i s an agreement that any pressures for a real appreciation o f the exchange rate from a scaling up of external aid will be accommodated through a nominal exchange rate appreciation. This will maintain low inflation while raising absorption and thus avoid an increase indomestic debt26. 26The 2006program envisages a reductioninconsolidated domestic debt. 60 IV. Conclusion 10. Although the MDRI lowers Rwanda's immediaterisk of debt distress, Rwanda's debt situation couldquickly become unsustainablewithout a high and sustained level of grant financing and strong export growth. As shown in the DSA, even with a substantial share o f grants in gross government financing, Rwanda's external debt situation becomes unsustainable in the medium term. Given Rwanda's relatively small export base, a terms o f trade shock or the failure to increase exports could result in an unsustainable deterioration in the debt indicators. Thus overall Rwandais considered to be at a highrisk o fdebt distress. 11. The analysis suggests that structural reforms should focus on better protecting Rwanda against shocks. The government is using the recently completed Diagnostic Trade Integration Study (DTIS) along with an export promotion action plan to design reforms and measures to improve trade facilitation. Specifically, there will be an increased focus on nontraditional and highvalue exports such as horticulture and washed coffee. The Agriculture Sector Strategy has also identified areas o f investment to support improved production and extension for farmers. Moreover, with support from both the EU and the World Bank, investments in road construction should help reduce the costs o f transport as should regional projects through the Nile Basin Initiative, and a recently approved regional Bank project on transport. In addition, Rwanda recently joined COMESA, and i s expected to join the Eastern Africa Community later this year. These investments and reforms are expected to assist in increasing real growth, while strengthening and diversifying the export base. The implementation o f prudent debt management and the efficient allocation o f donor funds will also play a critical role inensuringthat debt remains sustainable inthe long term. 61 Figure 1. Country: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006-26 (Inpercent) 45 N P V o f debt-to-GDP ratio 35 - __----- 30 - 25 - 20 - - - - Baseline 15 - --- Historical scenario Most extreme stress test 10 - Threshold 5 " " " " " " " " " " " 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 350 N P V o f debt-to-exports ratio 300 250 200 150 100 50 - - - Most extreme stress test Threshold 0 ~ ' " " ' " " " " " " " ' 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 25 Debt service-to-exports ratio 2 0 . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 - ---- I O - e - - /-- -c - -c/-- 4 4 / ----- - 5 - Baseline Historical scenario Most extreme stress test Threshold 0 Source: Staff projections and simulations. 62 o o o eo oo fm: o o w p n N 63 m m m -m mN - m m m N N m N N a - * N N hF: 2 ; z00 2 2 5 2 " 2 C P .* B . Q N 64 Annex 10: CountryIndicators Rwanda at a glance 7/27/06 Sub- POVERTYand SOCIAL Saharan LOW- Rwanda Afrlca Income Developmentdiamond' 2005 Population,mid-year(millions) 9.0 726 2,343 GNI per capita (Atlas method, US$) 230 600 510 Life expectancy GNI (Atlas method, US$ billions) 2.1 437 1,188 - Average annual growth, 199905 Population(%) 3.1 2.3 1.9 Laborforce (%) 4.0 2.4 2.2 Gross *ei prima0 Most recent estlmate (latest year available, 199905) enrollmen' Poverty(% of population below nationalpoverty line) 60 Urban populationI%of total population) 20 37 31 Life expectancyat birth (years) 44 47 58 Infantmortality (per 1,000live births) 116 101 79 Child malnutrition(% of children under 5) 24 43 Access to improvedwater source Access to an improvedwater source (% of population) 58 75 Literacy/% of populationage 15+) 71 60 61 Gross primaryenrollment (% of school-agepopulation) 119 93 100 Rwanda Male 118 96 105 Low-incomegroup ~ Female 120 87 94 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1985 1995 2004 2005 Economic ratios* GDP (US$ billions) 1.7 1.3 1.8 2.2 Grosscapital formatlon/GDP 17.3 13.4 20.5 22.3 Exportsof goods and services/GDP 10.8 5.2 10.3 9.5 Trade Grossdomestic savings/GDP 8.2 -7.3 2.4 0.2 Gross nationalsavingsiGDP Currentaccount balance/GDP -3.9 -1.1 -3.0 -3.1 InterestpaymentdGDP Domestic Capital 0.4 0.7 0.6 Total debVGDP 21.3 79.7 90.2 70.1 savings formation Total debt service/exports 10.8 22.8 15.3 Presentvalue of debVGDP Presentvalue of debVexports indebtedness 1985-95 199505 2004 2005 ZOO509 (average annual growth) GDP 4 . 4 7.2 4.0 6.0 4.0 Rwanda GDP per capita -2.9 1.6 2.5 4.2 1.7 __. Low-incomegroup Exportsof goods and Services -12.3 17.5 11.2 -5.4 9.1 STRUCTUREof the ECONOMY I lge5lQg5 Growth of capital and GDP (%) (% of GDP) 1 -- I Agriculture 45.7 48.9 45.0 45.9 1u industry 24.8 17.0 22.6 22.0 10 Manufacturing 15.0 10.9 11.0 10.4 0 Services 29.5 36.1 32.4 32.1 Householdfinal consumptionexpenditure 805 969 847 666 2 0 1 Generalgov't final consumptionexpenditure 11 3 103 129 131 s-*d- "GCF -GDP (average annual growth) Agriculture -28 7 4 0 0 Industry -98 7 3 2 2 Manufacturing -94 4 6 5 8 Services -32 6 9 9 8 Householdfinal consumptionexpenditure 0 3 4 8 4 6 Generalgov't Rnal consumptionexpenditure -02 106 -114 Grosscapital formation -12.2 5.1 14.0 3.8 -hports -O-lmports importsof goods and services 6.1 2.5 4.2 18.9 Note: 2005 data are preliminaryestimates. 'The diamondsshow four key indicators in the country (in bold) comparedwith its income-groupaverage. If data are missing,the diamond will be incomplete. 65 PRICES and GOVERNMENT FINANCE isas 1995 2004 2005 Domestic prices lnflatlon (%) (% changej l5T Consumer prices 1.8 22.0 12.0 9.2 Implicit GDP deflator 4.6 51.3 12.0 7.1 Governmentfinance (% of GDP, includes current gantsJ Current revenue 12.2 18.1 25.9 29.2 Current budget balance 2.3 5.7 9.9 11.3 Overall surplus/deflcit -2.4 -0.2 0.7 TRADE LOO 1985 1995 2004 2005 (US$ millions) Exportand import levels (US$mlll.) Total exports (fob) 119 50 97 125 7 Coffee 86 39 31 38 350 Tea 17 4 23 24 300 Manufactures 5 4 30 32 250 Total imports (cif) 274 238 362 374 200 Food 41 56 65 69 150 Fuel and energy 51 22 69 71 100 50 Capital goods 56 50 68 76 0 Export price index (2000=100J 88 109 63 78 99 00 01 02 03 04 05 Importprice index (2000=100J 70 100 108 119 IB Exports rn Imports Terms of trade (2000=100) 126 110 58 65 BALANCE of PAYMENTS 1985 1995 2004 2005 (US$ millions) Current account balance to GDP ( O h ) Exportsof goods and services 154 67 189 226 Imports of goods and services 328 334 524 664 Resource balance -174 -267 -335 -438 Net income -9 5 -34 -25 Net current transfers 116 247 313 397 Current account balance -66 -15 -56 -66 Financing items (net) 22 50 158 178 Changes in net reserves 45 -35 -101 -111 Memo: Reserves includinggold (US$ millions) 113 99 314 406 Conversion rate (DEC. locai/US$j 101.3 262.2 574.6 555.9 EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 (US$ millionsj 1 Composition of 2004 debt (US$mill.) Total debt outstandingand disbursed 366 1,031 1,656 1,510 IBRD 0 0 0 0 G: 18 IDA 152 512 1,020 980 E: 141 F: Total debt service 18 20 30 IBRD 0 0 0 0 IDA 2 13 6 23 Compositionof net resource flows Official grants Official creditors 71 43 83 Privatecreditors -3 0 0 Foreign direct investment (net inflows) 15 2 Portfolio equity (net inflows) 0 0 World Bank program Commitments 17 50 35 100 A IBRD E . Bilateral Disbursements 30 35 82 113 B IDA -- 0. Othermultilateral F. Private Principal repayments 0 6 0 15 C .IMF G Short-term - Net flows 29 29 82 98 Interest payments 1 7 6 8 Nettransfers 28 22 76 90 DevelopmentEconomics 7/27/06 66 REPUBLIC OF RWANDA Kigali,.........3...1..,..JUIL......2006....... ... .... MINISTRY OFFlNANCE AND ECONOMICPLANNING P.O. Box 158 Kigali Tel: +250-577994 Fax: +250-577581 E-mail :rnfin@rwandal .corn Mr.PedroALBA CountryDirectorfor Rwanda The World Bank Washington D.C. Dear Mr.Alba, - RE:INTERIMSTRATEGY NOTE: NONOBJECTIONFORDISCLOSURE Ihavethepleasureto communicate to you that the Government ofRwandagrants permission to disclose the ISN, following Board discussions and once it has been finalized by the Bank. Let me also take this opportunity to convey the great satisfaction and appreciation for the way our negotiations around the resource allocation under the forthcoming ISN were conducted smoothly. IlookforwardtomeetingyousoonduringtheAnnualMeetingsinSeptember. _--..... Yours sincerely, KIGALI MAP SECTION