Rwanda - Emergency Reintegration and Recovery Credit

Report No. PIC5330 Project Name Rwanda-Emergency Reintegration and Recovery Credit Region Africa Sector Rehabilitation and Recovery Project ID RWPE48389 Borrower Government of Rwanda Implementing Agency Ministry of Finance and Economic Planning, P.O.Box 46, Kigali, Rwanda Tel.: 250-74785; Fax: 250-75719 Date June 10, 1997 Appraisal Date May 12, 1997 Board Date June 26, 1997 Country Background 1. Rwanda's history of ethnic conflict culminated in genocide, civil war and massive displacement of the population in 1994. The genocide that started in April 1994 took over half a million lives, and the civil war that followed led to the flight of about 2 million Rwandans to the Democratic Republic of Congo (See 1/), Burundi and Tanzania. A government of national unity, formed in July 1994, after the civil war, affirmed its determination to work for peace and national reconciliation, bring to justice the perpetrators of the genocide, facilitate the resettlement of internally displaced persons and the return and re-integration of all refugees, and reform and liberalize the economy. The Government encouraged all refugees to return, with assurances of their security and right to the properties they left behind. Following this, an estimated 800,000 exiles of past conflicts (old case load refugees), returned to Rwanda in 1994 and 1995. However, for over two years, the vast majority of the 1994 refugees (new case load) remained in the camps outside Rwanda until civil wars in both Burundi and Democratic Republic of Congo forced them to return to Rwanda. About sixty thousand refugees returned from Burundi in August 1996, and a massive influx of an estimated 700,000 refugees from Democratic Republic of Congo took place within two weeks in November 1996. This was followed in December 1996 by the return of 500,000 refugees from Tanzania. International efforts are underway to bring back an estimated 100,000 Rwandan refugees still stranded in Democratic Republic of Congo. The Emergency 2. The Economic and Social Context. The events of 1994 destroyed Rwanda's social fabric, damaged the social and economic infrastructure further, impoverished the population and harmed the fragile physical environment and its eco- balance. The population of vulnerable groups such as widows,  unaccompanied children, female headed households, increased rapidly. Due to the targeting of males for killing in the genocide, the country is now predominantly female, with an estimated 60 percent of the population. The events decimated institutional capacity and the active labor force. The Government lost most of its experienced and qualified civil servants, who were killed or fled the country. The private sector also lost considerable human and physical capital. 3. Before the events of 1994, the Rwandan economy was on the decline. The per capita income had declined from US$380 in 1988 to US$250 in 1993 and US$150 in 1994. The social indicators, which used to be above Sub-Saharan Africa averages, deteriorated in the late 80s. The share of social sectors in recurrent expenditures reached 38 percent in 1985 but subsequently declined to 20 percent in 1993, and 24 percent of a much smaller recurrent expenditure in 1995. Social services were restored fairly rapidly after the war, with the financial and technical assistance of donors and NGOs. However, the social sectors suffer from an acute lack of capacity such as doctors, medical technicians and nurses in the health sector, and teachers at all levels of the education system. More than 50 percent of the primary school teachers are untrained and the secondary and university levels lack qualified instructors. The poor capacity in the social sector, due in part to the poor wages in government service, is a severe impediment to the provision of social services. 4. Since the end of the war, progress has been made in resettling internally displaced persons and in enhancing peace and security. After a long delay, the trials of persons detained for alleged involvement in the genocide started in late 1996 but the task of trying the over 100,000 in jail awaiting trial is formidable for the still fragile justice system. Progress has been made in the rehabilitation of institutional and economic infrastructure, with assistance from donors, NGOs and multilateral financial institutions. The civil service has been reconstituted, and capacity building efforts are underway. The key economic institutions, notably the Ministries of Finance and Economic Planning and the central bank, the Banque Nationale du Rwanda (BNR), have been rehabilitated and the budget system and public investment program have been reinstated. In 1995, the GOR took the initial steps at economic reform by liberalizing the trade and exchange regime and in 1996, the National Assembly passed a law that paves the way for the privatization of all state enterprises, but progress in implementation has been slow. 5. As a result of the progress outlined above, the economy has partially recovered from the steep decline by 49 percent of real GDP in 1994, and the increase in the inflation rate to 64 percent per annum compared to 12 percent in 1993. Real GDP grew by 25 percent in 1995 and 13 percent in 1996. However, the real GDP in 1996 was only 72 percent of its 1990 level. Inflation has been brought under control due to good fiscal and monetary management and to external balance of payments and budget support, principally from IDA, the IMF and African Development Bank (AfDB). The rate of -2 -  inflation fell to 22 percent per annum in 1995, 5 percent on an annual basis in October 1996, and an average of 9 percent for 1996. 6. Government revenues, only about 4 percent of GDP in 1994, rose to 7.1 percent and 9.6 percent in 1995 and 1996 respectively and thus remains much below the 12-14 percent of GDP achieved before the war. Thus, the fiscal situation continues to be very precarious, with the fiscal deficit, excluding grants, equivalent to 14 percent of GDP. The insecurity in the country and region has made military spending onerous, at an equivalent of 5.5 percent of GDP in 1996, and an expected 4.2 percent of GDP in 1997. The burden of external and internal public debt is very high, with total external debt at US$1.1 billion or 84 percent of GDP and scheduled external debt service ratio of 41 percent in 1996. Eighty three percent of the debt is owed to multilateral creditors. Total domestic debt is estimated at US$310 million. The Government is not current in debt service and continues to accumulate external and domestic debt service arrears, estimated at US$79 million and US$62 million respectively in end 1996. 7. Impact and Needs. With the return of the majority of the refugees, Rwanda is now in a position to squarely face the challenges of national reintegration and reconciliation while consolidating the progress made in economic recovery and stability and in building institutional capacity. These are enormous challenges in the fragile social and economic situation in Rwanda. The immediate priority is the resettlement and reintegration of the returned 1.3 million new case load refugees, the old case load refugees, and the large number of victims of the genocide. Priority needs are for permanent shelter, support for building sustainable livelihoods, provision of education and health services, improved justice and security, capacity building and food aid. The programs and budgets to resettle and reintegrate refugees, in place before November 1996, were based on a much slower rate of inflow of refugees and could not cope with their sudden and massive return. The Government needed a coherent emergency program and immediate budget assistance to cope with these urgent needs. 8. Permanent Settlements. Consistent with the policy of the government that returning new case load refugees have the right to reclaim their properties from those who occupied them in their absence, many new case load returnees have been able to return to their old communities and exercised the right. However, this has led to the displacement of those old case load refugees who occupied these properties and made it imperative to resettle them permanently. In anticipation of the eventual return of the new case load refugees, a number of rural and urban sites were earmarked for the resettlement of old case load refugees. The GOR planned to support the construction of rural and urban housing, to supplement those being built/rehabilitated under self-help schemes supported by relief agencies and NGOs, and the rehabilitation of houses for victims of genocide and returned new case load refugees. However the GOR lacked funding to start the housing program and it has now intensified its search for financial assistance. - 3 -  9. Sustainable Livelihoods. Reintegration of the returned refugees and other vulnerable groups involves a rapid transition from dependence on relief to economic self-reliance. Most returned refugees have their roots in agriculture. For them, agriculture is the quickest way for employment and income. An estimated 200,000 households was expected to return to agriculture. These households need farm implements, seeds and other inputs to re-enter into agricultural production. Besides, the availability of non-farm employment and income generating activities will also facilitate the transition to normal productive lives. Creation of private sector jobs and opportunities for self-employment is therefore an essential element of the reintegration. Improved rural roads and transport are needed for the farmers in new and existing settlements to have access to markets. 10. Social Infrastructure. Progress has been made in repairing the damage of the social infrastructure by the events of 1994. This fragile infrastructure is faced with the task of providing services to an increased population. An estimated 200,000 school-age children, about 20 percent of current primary school enrollment, returned from the refugee camps and need to be enrolled in school. Additional teachers, rehabilitation and construction of schools, in-service teacher training, printing and distribution of books, and supplies for teachers and pupils are needed. Immediate actions for the health sector include the rehabilitation and re-equipment of facilities, training of health personnel, provision of medicines, vaccines and other supplies, and funds for operations and maintenance. Many qualified people have returned from exile; these could be employed in the social sector to ease its capacity constraints. This will only be possible if funds are made available from the national budget. 11. Justice and security. The transition from war to peace requires a stable social environment. The well-being of both new and old case load returnees and peaceful coexistence in the communes are essential for smooth reintegration. Resources are required to reinforce the judicial system to carry out the genocide trials and other criminal and civil judicial functions, to enhance the policing capacity at the communal level, and to support local administrations to promote reconciliation between the resident population and the returnees. An awareness-raising campaign, emphasizing respect for the rule of law, will be launched. 12. Capacity building Capacity building to enable national, prefecture and commune level institutions and organizations to use resources effectively, ensure sustainability, and empower the beneficiaries, is of paramount importance for reintegration. Capacity-building is needed to develop sustainable development strategies at commune and prefecture levels; to accelerate the shift from emergency assistance (saving lives) to development assistance (sustaining livelihoods); to empower the civil society and civic associations at the local level; and to ensure that all elements of society play a vital role in the rehabilitation and reconstruction of the country. -4-  13. Food Aid. Rwanda has experienced food deficits since 1990 due to civil strife and declining agricultural productivity. The drought in parts of the country in 1996, combined with the massive return of refugees has increased the food deficit and the need for food-aid. While necessary in an emergency such as this, food aid tends to distort markets and prices and undermine the adjustment in domestic production needed to move out of food aid dependency. The Bank, with the collaboration of donors and relief agencies, has worked out a framework for monetization of food aid, to help limit its adverse consequences on the economy. The counterpart funds from the monetization will be used to fund relief, and recurrent and development budget expenditures. The Response of the Government and the International Community. 14. A GOR-Donor meeting was held in Geneva on November 23, 1996, during which the Government requested assistance for an "Emergency Program for the Resettlement and Reintegration in the Context of the Present Massive Return of Refugees". The Government's strategy for the emergency is to link short-term humanitarian relief with the medium-term reintegration and reconstruction and longer-term reconciliation and sustainable development, requiring that emergency interventions be undertaken within the existing development framework, and thus be well coordinated. A joint Bank/UN/GOR Assessment (JAM) mission in December 1996 assisted the GOR to develop the Emergency Reintegration and Reconstruction Program (ERRP), a sectoral and community level program aimed at resettlement, reintegration and national reconciliation. ERRP will help affected populations acquire permanent shelter, engage in sustainable means of livelihood, have access to social services, and participate in the social and political activities in their communities. 15. ERRP envisages two phases. The first phase concentrates on providing immediate assistance to the returnees with food, shelter and economic and social services. The second phase would focus on enhancing social services, housing development, rural and urban infrastructure, national and local capacity building, income generating activities, and justice and security based on coordinated national and community interventions. Sectoral projects by the central government will be complemented by community-based projects which will help to strengthen communities, rebuild social capital, directly address rural poverty, and lay the foundations for national reconciliation and sustainable development. 16. A joint Bank/Fund/AfDB mission visited Rwanda in January/February 1997 and assisted the GOR to integrate the interventions identified by the JAM mission into the budget framework and assess the financing requirements for the budget for 1997. Taking into account the impact of the massive return of refugees, the final recurrent budget has a financing gap, exclusive of external and internal debt arrears, of US$109 million (7 percent of GDP). New projects from the ERRP for housing, agricultural development, education and health services, capacity building, and community/rural development were added to the development budget to - 5 -  complement the existing reintegration-related projects. The joint mission also negotiated with the Government a policy document: Post-Conflict Reconstruction: Framework for Economic Policies (FEP) which set out the macroeconomic framework, and the policy and institutional reform measures to be undertaken in 1997-98 17. The GOR has approached bilateral donors, the European Union and the multilateral financial institutions for assistance in financing the emergency needs. The Government has planned a thematic consultation on reintegration for June/July 1997 with its donor partners to discuss and seek financing for the ERRP. A number of donors--the USAID, the EU, Canada, and Denmark--have sent missions to Kigali to discuss with the Government areas of assistance. The IMF Board approved on April 22, 1997, an emergency US$20 million post-conflict assistance for Rwanda and intends to provide additional resources through an ESAF in late 1997. To this end, the Bank, the Fund and the GOR will prepare a PFP to set out the medium-term reform framework. Once the ESAF is in place, the GOR will request a rescheduling from the Paris Club of its external debt arrears and current maturities on Naples terms. The AfDB plans to provide a new budget support credit in early 1998. 18. The priority however, is to finance the recurrent budget gap of 1997. Financing identified so far to cover the $109 million budget gap is $30.4 million comprising $16.5 million from the EU, $3.6 million from ongoing Dutch funding for IDA debt service, and $10.2 million from the ongoing AfDB balance of payments support operation. With the US$50 million from the ERRC and an additional US$10 million from the commodity monetization program, US$18.5 million remain to be identified. The Government is working with the Bretton Woods institutions and the UNDP to secure funding for this gap as well as the development budget gap. Rationale for Bank Involvement 19. The IDA Emergency Grant of August 1994 and the IDA Emergency Recovery Credit (ERC), approved by the by the Board in January 1995 greatly facilitated the rapid recovery and stabilization of the economy after the events of 1994. The Emergency Grant supported both humanitarian and economic rehabilitation activities. The foreign exchange from the ERC helped to revive private sector production and employment, and the counterpart funds enabled the Government to restore some operational capacity and provide social services. The credit is fully disbursed except for the small technical assistance component for strengthening economic management, which will be completed before the end of 1997. 20. The proposed ERRC is part of the continuing effort by the Bank to play a constructive role in the international effort at reconstruction and rapid economic recovery, and the reinforcement of peace and stability in Rwanda and the Great Lakes region generally. The World Bank's participation in the emergency program is important for encouraging the donors to contribute to its financing. The ERRC will finance private sector imports and the counterpart funds will enable the Government to finance basic - 6 -  social and economic services to the recent returnees and the existing population, facilitating the rapid transition to productive economic and social life. The expansion of private sector economic activity will create employment which would reinforce the reintegration effort. Overall, the ERRC will enhance macroeconomic growth and stability. The proposed emergency credit 21. The need of Rwanda for budget support is urgent and a quick- disbursing emergency operation is the most appropriate instrument to provide assistance. It has the advantage that it can be delivered quickly. The alternatives -- a rehabilitation import credit and a structural adjustment credit -- will require more time to prepare and therefore unlikely to meet the financing needs of 1997. The Government will continue to implement policy and institutional reform, based on the Framework for Economic Policies, developed jointly with the staff of the Bank and the Fund. The Bretton Woods institutions will support the GOR's reform efforts with assistance for studies and consensus building through information, education, and communications programs. 22. The proposed amount for the credit is US$50 million of quick disbursing import support. The credit amount is based on (i) the size of the budget gap and the expected contributions from other sources; (ii) the size of private sector imports; and (iii) the experience of the last emergency credit. From the indications of what bilateral donors are able to contribute, a sizable contribution would be needed from the Bank to be able to substantially narrow the funding gap. As private sector imports amount to about US$200 million per year, and with exports of less than US$100 million per year, the private sector can absorb the proposed amount of foreign exchange within the twelve months during which the credit is expected to disburse. For the ERC, the amount of about US$45 million was easily used up in approximately 15 months. 23. The proceeds of the credit will finance 100 percent of the costs, including direct cost, insurance and freight, of goods imported by the private sector from eligible sources based on a positive list of goods. The selection of eligible imports will be guided by (i) relevance to the emergency; (ii) importance to economic reconstruction and development; and (iii) contribution to economic and social activity. Pre-shipment inspection for quality, quantity and price will be required. The counterparts funds from the imports will go to support the general government budget. Since the return of the refugees in November 1996, the Government has faced a severe financial constraint and has had to postpone budget expenditures. As the credit will be effective only in the second half of 1997, a retroactive withdrawal of up to 25% of the credit amount covering a 4-month-period prior to the date of the signing of the credit agreement will be recommended. Based on the experience of the Emergency Recovery Credit, we expect the funds to be fully disbursed within 12 months. 24. The current IDA portfolio of projects has largely been - 7 -  restructured to meet high priority needs of the country, such as health immunization, rehabilitation of rural schools and health centers, provision of water and sanitation services, capacity and institution building, and economic reform. Projects in education, health, infrastructure, social action fund, and private sector development, will continue to be used to meet emergency needs, with restructuring where necessary. Funds from the social action fund project will be used to pilot, in 1997, community-based actions, as proposed in the ERRP. On policy reform such as privatization of parastatals, the pace has been slow and there is still need for clear government leadership. Lessons from Other Emergency Operations 25. The lessons learned from the Emergency Recovery Credit (ERC) [Cr 2678 RWI as well as from similar operations in post-conflict situations have been incorporated into the design of the program and credit. The ERC was to (i) provide the GOR with the resources to begin the restoration of key economic and social services and rebuild institutional capacity, and (ii) provide the private sector with the foreign exchange to resume operations and create jobs. Project effectiveness was delayed because the GOR failed to meet the required condition: to recruit a procurement agent to assist in public sector procurement of goods to be financed by the credit. The implementation was able to proceed only after a modification of the DCA which allowed the disbursement for private sector imports to proceed. Eventually, the government requested and the Bank agreed to reallocate the public sector component to finance private sector imports only. Thereafter, the project disbursed rapidly and was successful in achieving its objectives. The most important lesson from this experience is to keep the design of the project simple, building on the procedures that worked well for ERC. The second lesson is to ensure Government commitment to any agreements and understandings at the outset. The Bank's Resident mission staff were deeply involved in the design of the ERRP and this operation and therefore will be well suited to coordinate the implementation. 26. The design of the ERRC has benefited from accumulated experience in post conflict reconstruction. In designing the overall emergency program, the Bretton Woods institutions and the UNDP sent joint missions with strong post-conflict background to work with the Government. Implementation of the emergency credit 27. The Ministry of Finance and Economic Planning will have the overall responsibility for the implementation of the credit. The Ministry will appoint an officer, at the level of Director or above to coordinate the implementation. The relevant services in the central bank, the BNR, will be assigned the responsibility for collecting the eligible import documents, and preparing statements of expenditures and requests for reimbursement. Disbursement of the proceeds of the credit will be on a reimbursement basis and there will be no special account into which IDA would advance funds. Disbursement will be by statements of expenditure for eligible - 8 -  imports contracts under US$2 million. Supporting documentation will be kept locally to enable supervision by Bank staff in the field and by auditors acceptable to the Bank. Based on the experience of the Emergency Recovery Credit, the funds are expected to be fully disbursed within 12 months. Environmental Aspects 28. The implementation of the ERRC is not expected to have any negative environmental impact. No environmental assessment is required and is therefore placed in Category C. Risks of the Proposed Approach 29. The two main risks to the consolidation of social and economic recovery, which this operation is to support, are operational and security related. On the operational side, the main risks are the lack of government commitment to the 1997 budget, the main instrument for financing resettlement and reintegration and economic recovery, and the lack of capacity and budget discipline which could jeopardize budget implementation. However, the experience of the last two years of budget management indicates that the risks are small. The GOR takes the budget estimates seriously and the ministries make the effort to contain spending within the budget estimates. The Ministry of Finance has developed the capacity to monitor budget expenditures and the relevant information is available on time to make necessary mid-course corrections. Another operational risk relates to underfunding of the program by external partners, in which case, the expected benefits will not be realized. 30. Escalation of insecurity is a big risk to any economic program in Rwanda. Even with full international support for the reintegration and reconciliation program of the Government, a deterioration of the national security situation would seriously undermine the implementation and outcomes from the program. With serious insecurity, Government would likely move budget resources from developmental programs to the military and reestablishing government control would have priority over reintegration and economic recovery. Thus the old and new case load refugees would not be successfully integrated into the society, national reconciliation would be made even more difficult, and the economic assistance would not be effective. The current assessment by donors assisting Rwanda is that it is appropriate to undertake economic assistance in the current environment while being aware of the risks of possible escalation of insecurity or the onset of outright conflict. The absence of assistance at this point could well lead to an aggravation of the crisis and damage the basis for eventual sustainable growth. 1/ The new name of the country, which until May 1997, was known as Zaire. 9  Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending June 20, 1997. - 10 -