Rwanda - Recent economic developments and current policy issues

Report No. 6191-RW Rwanda Recent Economic Developments and Current Policy Issues October 31, 1986 Eastern ancd Southern Africa Country Programs Department II FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Rwanda Franc (RwF) Exchange Rates (annual average) From January 1974 through August 1983 the Rwanda Franc was pegged to the U.S. dollar at a rate of exchange of US$1.00 - RwF 92.84. Since September 1983 the Rwanda Franc has been pegged to the SDR at a rate of exchange of SDR 1.00 RwF 102.71. Year US $1 1980 RwF 92.84 1981 RwF 92.84 1982 RwF 92.84 1983 RwF 94.34 1984 RwF 100.17 1985 RwF 101.26 1986 (1st 8 months) RwF 89.90 Fiscal Year January 1 - December 31 Standards: metric  FOR OMCIL USE ONLY PREFACE This economic memorandum reviews Rwanda's macroeconomic performance to date in the 1980s and offers en assessment of some current policy issues of particular importance. It is based on the findings of an economic mission that visited Rwanda in September 1985. The members of the mission were: Robert Armstrong (mL;aion chief), David Brodsky (deputy mission chief, task manager), Zeynep Taymas (country economist), Janvier Kpourou-Litse (economist, statistical annex and effective protection study), Mathurin Gbetibouo (economist, analysis of export crop sector), Peter van der Veen (mining engineer), Paolo Leon (consultant, public enterprises), Mary Reintsma (consultant, food crops), Mustafa Soykan (consultant, public investment program), and Robert Weaver (consultant, analysis of export crop sector). The principal authors are David Brodsky and Zeynep Taymas. This report has also benefitted from the study 'Planning end Budgeting in Rwanda" prepared by D. Williamson in 1984. An earlier draft of this report was discussed with the Government in September 1986. The comments have been incorporated in this final version. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents nay not otherwise be disclosed without World Bank authorization  RWANiDA, RECENT ECONOMIC DEVELOPMENTS AND GURENT POLICY ISSUES TABLE OF CONTENTS Pate No. PREFACE LIST OF TEXT TABLES GLOSSARY OF ACRONYMS AND INITIALS. COUNTRY DATA SUMIARY AND CONCLUSIONS ......................i-xi Is Introduction ........................................ 1 II. Recent Economic Developments 3 A* Ove..4 e w 3 B. Problems of Economic Data 3 C. Economic Developwents 1980-85 5 III. Macroeconomic Manaftement: Selected Issues 18 A. Incentive Structure for Industry 18 B. Mining Sector Rehabilitation 35 C. Public Sector Management ....38 1- Public Finance 38 2- Capital Expenditures and Public Investment Program ...... 45 3- Parastatals and Mixed Enterprises 53 D. Management of Balance of Payments and External Debt ..... 62 IV. Medium-Term Prospects ...... 67 A. Medium term Balance of Payments 67 B. Budgetary Prospects 71 C. Policy Implications 74 APPENDICES 1. Methodology employed in estimating national accounts..... 76 2. Methodology used in survey of industrial officiency ..... 81 3. List of PEs, MEs, Regies and Information on ............. 83 Selected PEs 4. Food Crops . 99 5. Major Ongoing and Programmed Studies o'. Rwanda ......... 121 STATISTICAL APPENDIX .... 128 MAP .  LIST OF TEXT TABLES Table Number Pate No. Chapter II 2.1 Comparison of Alternatives Estimates for GDP Growth Rates, 1980-1984 ... 4 2.2 External Trade Indices, 1977-1985 ..... 6 2.3 Balance of Payments, 1980-85 8 2.4 Import Volume, 1980-1985 ............................. . 10 2.5 GDP Growth, 1980-1984 .................. 2.6 Structure of Demand .... ............................... 14 2.7 Central Government Finances, 1980-85 .................. 15 2.8 Monetary Survey ....................................... 16 Chapter III 3.1 Structure of Industry - 1983 .......................... 19 3.2 Present Tariff System .o. . ... ..................... . 21 3.3 Enterprises Currently Protected ....................... 23 3.4 Bilateral Real Exchange Rate Indices, 1978-1985 ....... 27 3.5 Industry Protection Rates ............................. 30 3.6 Domestic Resource Cost under Alternative Exchange Rate Hypotheses .............................. 33 3.7 Central Government Revenues ........................... 39 3.8 Tax Revenue as Percentage of GDP ...................... 40 3.9 Tax Buoyancy .... .......................... 40 3.10 Economic Classification of Current Expenditures in Selected Ministries .............................. 43 3.11 Third Development Plan, 1982-1986 - Investment Projects ................45 3.12 Sectoral Distribution of Investment Projects .......... 47 3.13 Public Investment Program 1986-1988 ....50 3.14 Non Financial Public Enterprises, Mixed Enterprises and Regies Net Profit/Loss by Economic Activity (after taxes) ...................................... 56 3.15 Subsidies to PEs and Regies 1974-1984 58 3.16 Alternative Definitions of Current Account Balance .... 64 3.17 External Public Debt ............................ ..... 66 Chapter IV 4.1 GDP Projections . .68 4.2 Balance of Payment Scenario ........................... 70 4.3 Government Budget Projections ...... ................... 72 4.4 Projected Structure of Coffee Revenues .... ............ 73  GLOSSARY OF ACRONYMS AND INITIALS BNR National Bank of Rwanda BRD Rwendese Development Bank CCCE Caisse Centrale pour la Cooperation Economique (France) CCO Centrale Comptable et Organisation CIC Interministerial Coordinating Committee DRC Domestic Resource Cost EEC European Economic Community ERP Effective Rate of Protection FAD African Development Fund FED European Development Fund GDP Gross Domestic Product GFCF Gross Fixed Capital Formation IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund LTC Long-Term Capital ME Mixed Enterprise MINAGRI Ministry of Agriculture MINIFINECO Miniatry of Finance and Economy MINIMART Ministry of Industry, Mines and Artisans MINIPLAN Ministry of Planning M4LT Medium and Long-Term Loans 'FS Non Factor Services NGO Nongovernmental Organization NRP Nominal Rate of Protection PE Public Enterprise (100% state-owned) PEP Public Expenditure Program PIP Public Investment Program PTA Preferential Trade Area SDR Special Drawing Right SOMIR4A Societe Mini'ere du Rwanda STC Short-Term Capital USAID U.S. Agency for International Development VA Value Added  COUNTRY DOTA-RWANDA ARtA (Thousand sq. km.) POPIUTION Door" (1"92) 26.8 8.6 million (mid-1982) 210 per *quarc km. Rate of growth 8.6S S98 per square km. of arabl land. (from 19Te to 1982) POPUATION C4MACTtIS:TICS (1978) IEALTN (1980) Crude birth rate (per 1000) 52 Population per phya;coan 8l840 Crude death rate (per 1000) 19 Population per hoapital bed 650 Percent irban 6 INCOME DISTRItIJTON Dow CONISUM1TION PER CAPITA S of national income, highest 4uint;le -- (K. loorma. of oil equivalent) 18 lowest quintile -_ ACCESS TO SAFE WATfR (180) ACCESS TO ELBTR1CITY S of population - total 84 1 of population - total - rural fM 0 NUTRITION EUCATION (1980) calorie intake a, I of reauirementa 88.0 Adult literacy rate 1 */ 87 per capita protein ietake (go/day) 50.0 Primry school enrol lmnt S 70 CMW PER CAPITA IN 1984 b/: UW6270 IOSS DOMESTIC PRODUCT IN 1984 AML RATE OF ORWYN (S CNSTANT 1988 PRICES) US$ I.N. 1979-83 194.00 COP at market pricee 1680. 7 100.0 5.6 0.5 Oross domestic investment 195.8 11.6 1. 0 10.6 tCrosa national savvings 106.8 6.3 -9.3 -28.5 Current account balance -140.8 -8 4 Exporto (e nfs) 174.5 10.4 0.3 -0.9 Imports (gtnfa) 290.8 17.3 6.4 11.1 ODP at factor cost 1449.4 100.0 5.0 -4.8 Primary sector 621.4 42.9 4.1 -14.7 Secondary sector 308.8 21.1 3.7 4.1 Tertiary sector 522.6 36.1 7.0 2.8 GOVERIET FINANCE (Central Government) (Ref min.) S of COP 1985 1988 1979 Current revenu* 190105 10.6 12.7 Current expenditure 19,102 10.C 8.7 Curront surplus 8 0.0 4.0 Deelopment expenditurc 8,600 c/ 2.0 2.2 a:/ According to estimates by the Ministry of Primary and Secondary Education. b:/ The per capita @W estimate calculated by the smem conversion technique me the world Bank Atlas. All other convermione to dollare in this table are et the average etchanse rate preveiling during the Period covered. c:/ budget estimtes. ~' not available. .. not applicable.  COUNIRY DATA - RWANDA (Mi ll ons Ref Outstanding End PFriod) MONEY, CRDIT AN PRICES 1980 1981 1982 1988 1984 1985 Money Supply */ 14117 189S8 16184 1884 19881 280 sank Credit to Government (net) -39a1 -2919 -682 2009 1912 1791 Salnk Credit to Private Sector 6179 7724 8027 8846 10269 18407 Sank Credit to Public Enterpriee 210 147 410 68S 616 678 (percentsge or Index Numbers) Money ax S of GDP 18.1 18.0 12.2 12.7 11.8 12.7 CPI Averase 2nd Queter 1982.100 88.0 90.8 101.9 108.6 114.8 116.8 Annual Percentage Changes in: Coneueer Price Index 7.8 6.8 12.6 8.6 8.4 1.7 Bank Credit to Government (net) 170.4 26.7 76.6 894.8 -4.9 -9.8 Sank Credit to Private Sector 48.5 28.0 3.9 4.0 28.0 80.6 Sank Credit to Public Enterprise -9.8 81.1 49.9 106.8 -17.6 -3.8 SALAWCE OF PAYMEMTS 1980 1981 1982 1988 1984 198S K4CFW0ISE EXPORTS (AVESAOE 1980-1988) (US$ MILLIONS) lJS Mln. Percent Exports (g+nfe) 16S.7 180.7 142.0 182.2 174.6 161.2 Coffee 80.7 62.8 Iaports (genfI) 322.8 881.9 838.6 812.4 812.8 886.1 Toa 14.9 11.6 Cassiterite/Tin 19.0 14.8 Resource Cap (deficit.-) -157.1 -181.2 -196.6 -160.2 -187.7 -174.9 Wolfram 8.2 2.8 Other 10.7 8.8 Factor Services (net) S. 11.5 0.0 -6.3 -5.0 -8.7 Totxl 128.8 100.0 Private Tranafera (net) -3.2 -3.0 4.7 8.S 1.9 4.8 Balance on Current Account -15.3 -172.7 -191.9 -161.0 -140.8 -176.8 EXTE4A1L DESt AS OF DEC. S1, 198S USS Min. Official Crants 107.4 105.6 10.2 112.3 99.3 112.1 Public Debt, Incl. Guaranteed 324.4 Direct Private Foreign Investment 17.0 18.6 20.7 11.1 15.1 14.6 Non Guaranteed Private Debt -- Net MLT Loans 31.0 29.1 21.6 24.3 36.0 88.2 Total Outstanding and Disbursed 824.4 Other Capital (net) 0.6 -2.1 -0.7 1.1 -0.1 2.8 Short Term Capital (net) 21.8 19.9 8.6 -6.0 4.7 -8.0 DEST SERVICE RAIIO FOR 1985 b/ Percent Allocation of SDRe 3.1 2.7 0.0 0.0 0.0 0.0 --------------------------- ------- Errore & Omis ion -12.4 10.4 -0.1 1.2 -0.6 -0.8 Publie Debt, Incl. Guaranteed 9.5 Increase in Resnrves(-) -13.2 -11.8 86.8 17.0 -13.6 -0.2 Mon Guaranteed Private Debt -- Total Outstanding and Disbursed 9.8 Petrolueu Imports 29.8 88.5 39.1 44.8 81.1 81.5 IDA L-8INC AS OF SEt. 80,1986 US2 Min. RATE OF EXCHANOE Annual Averages ---------------- ----------------------------------------------------- Outstanding and DiObureed 1S.7 1980 1981 1982 1968 1984 1988 Lkndi bursed 182.9 Outstanding Inel. Undlibureed 819.6 US$ 1.00 a Rwf 92.84 92.84 92.84 94.34 100.17 101.26 a:/ Includes -oney and quasi-money. b:/ Debt service as a poreentage of exports of goods and non-factor service.  SUMMARY AND CONCLUSIONS Focus of praser.t report 1. Overall economi management in Rwanda has generally been sound and prudent. There are nevertheless a number of important areas in which improvements in macroeconomic management will be necessary if Rwanda is to return to the high growth path which eharacterized its development until the early 19808. Some of these issues have been identified by the Government in its 1985 Economic Recovery Program.1 Particular areas of reform, and areas in which the Government has requested World Bank assistance, include: (i) overall restructuring of the industrial sector-- of which public enterprise rehabilitation would be a major component; (ii) support for policy-based reform and rehabilitation of the mining sector; and (iii) technical assistance in the introduction of a public investment programming system, and the preparation and periodic updating of the public investment program. These subjects, all related to issues of short and medium-term economic management, form the core of the present report which is thus complementary in scope to the longer-term focus, and more sectoral orientation, of the preceding economic memorandum.2 A number of important sector issues have been addressed in recent Bank sector reports,3 and are also part of the continuing dialogue between the Government and the Bank. Background 2. Rwanda faces a number of major structural constraints to its economic development. Chief among these are: (i) its landlocked position- -more than 1400 km from the nearest Indian Ocean ports --which adds considerably to transport costs for both imports and exports, as well as rendering the country vulnerable to disruptions in supply routes; (ii) its lack of natural resources; (iii) its continuing narrow export base (i.e., coffee) which renders the economy vulnerable to external factors largely beyond its control; (iv) its lack of trained manpower; and (v) the growing scarcity of arable land, reflecting the continued rapid growth of population. 3. Indeed, with a population estimated in 1985 at 6.2 million, Rwanda is the most densely populated country in Africa (an average density of 250 11 Projet de programme d'assainissement et de relance de l'economie rwandaise, August 1985. This will subsequently be referred to as the Programme de Relance. 2/Rwanda Economic Memorandum. Recent Economic and Sectoral Developments and Current Policy Issues, Report No. 4059-RW, May 1983. 3/See, in particular, Rwanda, Agricultural Strateay' Review, Report No. 4635-RW, June 1985; Rwanda. Population. Health and Nutrition Sector Review, Report No. 4926-RW, August 1984; Rwanda. Education Sector Memorandum, Report No. 5276-RW, June 1985; Rwanda. The Manufacturing Sector: Performance and Policy Issues, Report No. 5302-RW, July 1985; and Joint UNDPIESMAP. Imoroved Charcoal Cookstove Strateav, October 1985.  - it - per square kilometer, or about 400 per square kilometer of arable land). The annual rate of population growth is currently estimated at 3.7 percent, among the highest in the world. Major consequences of the high (and increasing) population density includet (i) a continuing trend towards smaller and increasingly fragmented farms--as of 1985, the average farm consisted of 5 separate parcels totalling less than one hectare in area; and (ii) evidence in some area of declining sil fertily, reflecting the increasingly intensive use of arable land and the extension of cultivation over less fertile land. 4. Over the longer-term horizon, it should be emphasized, that population growth, along with the related problem of an increasingly binding land constraint, remains the single most important longer-term issue confronting Rwanda. The benefits of Improved overall economic management, as called for in this report, will of necessity be short-lived if major progress is not achieved in dealing with these longer-term issues. The fact that up to the present time Rwanda has successfully dealt with the consequences of a rapidly growing population should not engender complacency concerning the fundamental changes in the structure of development which will be required over the coming decades. In particular, the 'escape valve' of surplus agricultural land will not last much longer, as recent calculations show that even under favorable assumptions-- including intensive use of swamps and marshlands--before the turn of the century there will be no further arable land on which to expand cultivation.4 5. Despite the formidable constraints to development, average economic growth since Independence (July 1962) has been very high--an annual GDP growth rate of 6 percent, nearly double the average rate for sub-Saharan Africa recorded over this period. Rwanda has also been one of the relatively few sub-Saharan African countries In which per capita food production has increased over the previous decade. Economic management throughout this period has been characterized by its prudence, reflected in: (i) relatively small budgetary deficits (and even surpluses in a number of years); (ii) maintenance of an external reserve zatio (4 months of imports at end-1985) among the highest in Africa; and (iii) a debt service ratio (8 percent in 1985) less than one-third the average for sub- Saharan Africa. While the overall investment ratio (currently 12 percent of GDP) has been low by African standards, this has reflected primarily the relatively slow growth of absorptive capacity (including lack of skilled manpower), rather than financial constrei.nts.5 4/The importance of the population issue has been discussed in considerably greater detail in the sector report, Rwanda. Population, Health and Nutrition Sector Review, Report No. 4926-RW, August 1984. The Government has taken importnt steps towards formulating a population policy, beginning with the establishment of a National Population Office in 1981 with a mandate to carry out research in the area of population and economic developments, to study ways to integrate family planning services into the health care system, and to carry out this integration. 5/ln addition, the investment ratio for Rwanda is probably understated somewhat due to the continuing importance (even relative to other African countries) of the nonmonetized sector.  - iii - 6. Throughout most of this period, government economic policy has been non-interventionist. In the agricultural sector, food prices have been almost entirely market-determined, while in the industrial sector government intervention (until the late 1970s) was minimal. Industrial policy has also beea characterized by a relatively liberal trade and foreign exchange regime. While imports were subject to licensing, licenses were generally granted on a routine basis and, for the most part, there were few quantitative restrictions on imports. In addition, repatriation of dividends as well as earnings of expatriates have been permitted with only minimal restrictions. 7. The overall framework of government policy-making began to shift noticeably, however, in the late 1970s with the implementation of the Second Five Year Plan (1977-81). Largely reflecting the belief that the private sector was unwilling (or unable) to take the necessary risks to foster industrial growth, the Government began to participate in a number of joint ventures with foreign interests, and also financed (either directly, or with foreign assistance) a number of large industrial operations. By the early 1980s, it was estimated that one third of value added in the modern manufacturing sector was generated by enterprises with majority public ownership. Recent Economic Developments 8. The early 1980s witnessed a marked deterioration in both the overall economic climate and economic performance. The temporary nature of the large increase in government revenues arising from the world coffee boom was not sufficiently perceived, and it served instead as the basis for a near-doubling (in real terms) of government current expenditures between 1978 and 1981. The economy was thus left in an extremely vulnerable position when the external terms of trade declined by more than one-third during the 1980-81 period, as coffee prices returned to more normal levels. Combined with a relative stagnation in external aid inflows, the result was a significant deterioration in both the external balance of payments and the public finances. 9. At the same time, it became increasingly evident that a substantial portion of the industrial activities (including a large number of public enterprises) which had been recently created were not viable without excessive levels of protection and/or subsidies. Financial losses were but one aspect of the problem, as tariff protection (or in some cases prohibitions on competing imports) allowed enterprises to realize financial profits despite low (or even negative) economic returns. A number of the problems in this sector have their origin in the overall macroeconomic or sectoral environment, some in the rules and regulations between the enterprises and the Government, and others within the firms themselves. 10. In response to the deteriorating economic situation, in late 1982 the Government adopted a number of austerity measures aimed primarily at reducing government current expenditures and tightening import licensing procedures to restrict import growth. While the available data are conflicting, it appears that the adoption of these austerity measures was linked to a substantial deceleration in economic growth. Thus, Bank estimates indicate that real per capita GDP growth, which in the period 1977-81 had averaged 2.5 percent per annum, was negative in each of the three years 1982-84.  - iv - 11. The Government's response to the economic crisis of the early 1980s resulted in an increased level of government intervention in the economy. This was not, in general, due to an explicit government desire to increase its intervention but rather resulted from the ad hoc manner in which attempts were made to respond to individual problems as they arose. The increased strictness with which price controls were applied beginning in early 1983 was thus due to the desire to prevent prices of imported goods from rising excessively as a result of the adoption of restrictive measures to limit imports. Increased restrictions on availability of foreign exchange for payments of invisibles were similarly adopted in an attempt to limit the deterioration in the balance of payments, while the growing difficulties confronting a number of industrial enterprises were addressed through the imposition of "temporary' import prohibitions on competing imports. 12. These austerity measures, together with more favorable terms of trade, led to a significant improvement in the balance of payments situation, as overall surpluses were recorded in both 1984 and 1985. Similarly, lower levels of government current expenditures reduced fiscal deficits in 1984 and 1985 to more manageable levels. Preliminary data for 1985 suggest the beginning of an upturn in real economic growth, as real GDP is estimated to have increased by about 5 percent. Most major categories of manufactures recorded substantial increases in production, and agricultural output more than recovered from the shortfalls reported in 1984. These favorable developments were achieved despite the presence of three unfavorable factorss (i) the collapse of the domestic mining sector; (ii) the temporary interruption, beginning in October 1985, of the principal international transport route through Uganda, due to the disturbed conditions in that country; and (iii) the significant decline in world prices for tea, which in recent years has become Rwanda's second leading export. 13. The improved economic situation has allowed the Government to loosen the strictness with which a number of austerity measures had been applied. In particular, the advanced import deposit scheme adopted in 1983 (for selected imports) has been eliminated for the large majority of imports, while, as currently applied, the price control system operates primarily as a price registration procedure and does not constrain importers or manufacturers. Current poliec issues and recommendations 14. The previous country economic memorandum addressed a wide range of policy issues and formulated a number of recommendations for actions including, inter alia, the need for: (i) pursuing more active policy- making with respect to the appropriate setting and monitoring of exchange, tax, tariff, interest and public sector wage rates; (ii) preparing a realistic public investment program; (iii) applying more rigorous controls on public sector employment; and (iv) improving institutional and procedural arrangements to facilitate intra-governmental communication and policy coordination. A number of these recommendations were subsequeatly followed up with concrete action. In September 1983, the Government delinked the Rwandese franc from the U.S. dollar and tied it to the SDR. It is currently undertaking a study of the tariff system (with the assistance of US AID) in order to rationalize the existing system.  Institutional changes in recent years have included the establishment of a number of interministerial coordinating committees which have served to improve coordination among various institutions dealing with developsant policy. Finally, the Government has taken a decision to prepare multi-year programming of public investments, although a rolling investment program has not yet been made an integral part of the Fourth Development Plan, currently under preparation. 15. As noted earlier, the present report focuses on a number of issues of short and medium-term economic management which have been identified by the Government in its 1985 Proaramme de Relance, and in which improved policies will be required if Rwanda is to return to its previous high growth path. These includes (i) a rationalization of the overall industrial incentives system; (ii) more effective public sector management, with a particular focus on 1ablic enterprise reform and the continuing need for public investment programming; and (iii) the urgent need for mining sector rehabilitation, if the sector is to continue to play an important role in Rwanda's development. Major findings and recommendations are summarized below. A. Industrial incentives 16. As part of its effort to restructure the industrial sector, it will be necessary for the Government to ensure that the industrial incentives system plays an appropriate role in promoting the development of economically viable industries. Specific issues which need to be addressed include the system of protection of domestic industry, exchange rate management and price controls. The mission's conclusions in these areas are summarized below.6 Mi) Protection of domestic industry 17. The mission's survey of the efficiency of domestic industrial enterprises indicates that a substantial part of the rapid industrial growth achieved in recent years has resulted from activities which are not viable without excessive levels of protection. It may be entirely appropriate that in their initial stages some enterprises be given a measure of protection, to allow them the opportunity to develop into economically and financially viable activities. However, such protection should take the form only of temporary tariff protection, and this only in cases where there is a clearly demonstrated potential for efficient operation. It is strongly recommended that the Government discontinue its current policy of granting to enterprises in difficulty total protection through the prohibition of import licenses for competing products.7 6/The current USAID PRIME project is financing a comprehensive review of the entire industrial incentives structure. 7/Currently, any change in the tariff system requires formal legislative approval. The practical implementation of this recommendation would thus be facilitated by a change in the legal framework giving the Government the direct authority to institute temporary tariff surcharges.  - vi - 18. With regard to the external tariff system itself, information is not yet available on the major modifications scheduled to be implemented in 1986. It is recommended that in formulating its new tariff system, the Govirnment make maximum use of the results of USAID's ongoing investment incentives study, in order to ensure the overall neutrality of the tariff system on producer incentives. It is also recommended that the Government carefully monitor the implementation of the proposed new system of import programming, to assure that it functions as intended as a means for further import liberalization rather than as a de facto system of import quotas. (ii) Exchange rate manaxement 19. The exchange rate policy of pegging to the U.S. dollar, maintained until September 1983 (at which time the exchange rate was devalued by 5 percent, and the peg shifted to the SDR), was primarily responsible for the substantial appreciation in real terms of the Rwandese franc in the early 1980s. The continuing relative unimportance of the parallel exchange market indicates, however, that the effects of this apparent overvaluation are less far-reaching th&n in a number of other African countries. Nonetheless, the appreciation of the real exchange rate appears linked to several unfavorable developments, includings (i) the maintenance of relatively high import levels in the face of declining personal incomes, which has led to a decline in the domestic savings rate; (ii) continued disincentives for domestic import-substitution and export diversification activities; (iii) continued high degree of dependence of domestic industry on imported inputs; and (iv) a continuing bias in favor of capital- intensive investment activities. 20. These considerations strongly suggest that the Government give serious consideration to a real exchange rate depreciation, either through a discrete adjustment or gradually over a 3-4 year period. Such an adjustment, through its effect on relative factor costs, would be consistent with the Government's objective of fostering increased employment in the urban sector, an objective which will become all the more pressing during the coming years in view of the projected high growth rate of urban population. (iii) Price controls 21. As noted above, price controls have been only loosely applied since early 1985. Nonetheless, the Government's August 1985 Economic Recovery Program calls for the implementation of stricter price controls, which would involve establishing differential profit margins for individual commodities. If implemented strictly, this would appear to be a step in the wrong direction as it could serve as a disincentive to private sector investment. As with any system of cost-plus pricing, there is a risk that inefficient producers (and importers) would be rewarded, as higher production (or import) costs would be translated into higher gross profits. Serious consideration should instead be given to further liberalization of price controls in the manufacturing sector, with the exception of imports of certain strategic commodities and subject to temporary price ceilings in cases where monopoly rent are present.  - vii - B. Public sector ianapement 22. Improvements in budgetary and accounting procedures, as well as in the efficiency of tax collection, are expected to result from the ongoing IDA-financed technical assistance project within the Ministry of Finance and Economy. On the expenditure side, a reduction in the public sector wage bill seems feasible, although this would require a comprehensive study of public sector employment. In the interim, some savings can be achieved through reductions in contractual unskilled labor. Other important areas where further improvements in public sector management should be pursued include the public enterprise sector, and the introduction of public si-estment programming. (i) Public enterprises 23. In response to the major problems that arose in the public enterprises in the early 1980s, the Government established, with EEC assistance, the Centrale Comptable et Organisation (CCO) to collect financial information and offer assistance to non-financial public enterprises in setting up proper accounting practices and accompanying organizational changes. More recently, the Government's Programme de Relance identifies a number of the most important problems facing the public and mixed enterprises. While details of new policies are not provided, new orientations are indicated in terms of improving public enterprise autonomy (presently very limited), the status of employees (presently treated as civil servants) and the procedures for appointing managers and selecting private partners. 24. While primarily of an ad hoc nature, these proposed changes appear to be in the right direction. There nonetheless remains a need for a more comprehensive framework for reform and rationalization of the parastatal sector, in order to assure that global, strategic and generic issues common to all such enterprises are fully taken into account. This would best be obtained through a full economic appraisal of existing enterprises (including regies) and their appropriate roles in the country's overall economic development. In particular, the main focus will have to be shifted from financial to economic viability, as in a number of cases the former has been obtained through either tariff increases or import prohibitions. 25. Once sufficient preparatory work is done, the Government should designate a properly equipped political authority to function as a coordination mechanism for the public enterprise reform effort. This coordination should facilitate the establishment of a clearly-defined framework defining relations between the State and the public enterprises, to enable them to perform in accordance with their stated objectives. At the sectoral level, this coordination should ensure that supervision of individual enterprises by sectoral ministries is consistent with the general strategy for state involvement in the economy; it should also ensure that such supervision does not undermine the degree of enterprise autonomy and responsibility necessary for the achievement of these objectives.  - viii - (ii) Public Investment Proaram 26. One of the principal recommendations of the last economic report was that the Government ahould give priority to the the preparation of a rolling Public Inveatment Program (PIP) covering a three year-period. The need for this instrument, which is now greater than ever, lies in the shortcomings of both the planning and budgetary processes as they have been effected to date. In particular, a properly formulated and executed PIP will facilitate the much needed coordination between the oversight ministries (MINIPLAN and MINIFINECO), on the one hand, and the technical ministries, on the other, as well as among the oversight ministries themselves. In iddition to strengthening Government control over its own investment program, the implementation of a PIP will also provide the Government with a powerful tool for improving aid coordination. 27. As a first step toward the development of systematic investment programming and the formulation of an initial PIP, the economic mission, in close cooperation with the staff of the Ministry of Plan (MINIPLAN) and other ministries, conducted a survey to gather data on projects in the pipeline for the 1986-88 period. Based on the available data, it is difficult to make a judgment on the appropriateness of the 1986-88 investment program since, with the exception of a few projects, economic rate of return studies are not available. Nonetheless, several projects stand out as requiring considerably more investigation before a decision should be taken in favor of their implementation. 28. The findings of the survey also point to the extent to which over the medium-term--i.e., after the effects of the temporary coffee boom have worked their way through the system--local currency financing availability may emerge as a binding constraint to future investments. This likely possible shortfall in domestic resources would come at a time when demands on government resources are bound to intensify, reflecting the need to both meet the growing demand for economic and social services and to finance the recurrent expenditures of ongoing and soon-to-be completed projects. 29. A rolling three-year PIP should be made an integral and essential element of the 1987-91 Five Year Plan currently under preparation. It is further recommended that at the earliest possible date the PIP be expanded to a more comprehensive public expenditure program (PEP), as over the coming years it will become increasingly urgent to take more fully into account recurrent expenditures arising from already-completed projects. Given the importance of external finance within the total of development resources available to Rwanda, aid coordination will be critical to the effective Implementation of a public expenditure program. In particular, foreign donors should assist in this process by making their aid commitments, wherever possible, on a multi-year basis. C. Mining sector 30. The mining sector, which in the past has accounted for up to 20 _rcent of Rwanda's exports, remains in a critical state. Industrial production, as well as exports, have been halted since August 1985, due to the cessation of operations of SOMIRWA, which was finally declared in a state of bankruptcy in October 1985. One of the major focuses of the mission was an examination of the current state of the mining sector and  - ix - its possibilities for rehabilitation. Since the mission, a further unsettling event has been the collapse of the International Tin Council (ITC), and declines of up to 50 percent in world tin prices. 31. Despite these negative developments, a basic conclusion-- reinforced by a follow-up visit in November 1985--is that mining in Rwanda remains a potentially viable activity. The Bank has indicated its willingness to respond positively to the Government's formal request for assistance to rehabilitate the mining sector, on the assumption that the remaining legal issues surrounding the use of ex-SE;HIRWA sites and equipment can be resolved. In the more immediate future, it is urgent that the Government take steps to restore operations (even at a minimal level), pending agreement on a longer-term strategy for mining sector rehabilitation. Failure to adopt such emergency measures to restore production would in all likelihood lead to irreparable long-term damage to the sector, reflecting the degradation of plant and equipment, and the departure of skilled (domestic as well as expatriate) labor. D. Aaricultural sector issues and recommendations8 32. The Government's basic strategy of increasing both food and cash crop production has generally been successful over the past few years. Rwanda is still in a position to feed its increasing population and has managed to maintain a fair market share for its major export crops (coffee and tea). The Government's strategy in the agricultural sector over the last few years has recently started to evolve from the integrated rural development approach, which is proving to be unsustainable without massive and continued external funding, towards strengthening agricultural services at a national level, especially agricultural research, extension and environmental production. This evolving strategy de-emphasises Government intervention in the sector and emphasizes the Ministry of Agriculture's promotion function. 33. However, a number of recent developments raise important questions concerning overall agricultural strategy in Rwanda. The uncertainties brought about by the drought of 1984 were followed by an overproduction of potatoes, with a subsequent serious decline in producer prices, putting pressure on the Government to intervene. The establishment of security stocks of beans, the major staple, at excessively high prices, has not only disrupted the market but threatens to have serious financial consequences for the parastatal involved (OPROVIA). The Government's recent decision to set the producer price for milk at too high a level, benefitting a few commercial producers, has already led to overproduction, with subsequent negative lmpact on consumption which in turn has jeopardized the long-term profitability of the dairies involved. No clear long-term strategy exists for coffee production, both in terms of quantity (price incentives, production potential and market potential) and quality (market development). The promotion of the use of agricultural inputs (mainly fertilizers) lacks a clear objective since relatively little is still known about the economics of fertilizer use in cash (as well as food) crops. 8/ The recommendations in this section are drawn primarily from the discussion of issues in the food crop sector presented in Appendix 4.  Finally, a number of issues relating to the prospects and justification for import substitution (wheat, sugar and, in particular, rice) and crop diversification still need to be addressed. The Miniasry of Agriculture recognizes this need but has so far lacked the resources .. analyze these issues sufficiently to detearmne the appropriate adjustments in its agricultural strategy. Likewise, MINAGRI has recently become aware of the adverse implications of a number of policy measures on agricultural production, which have not been fully assessed in the past. This is the case in particular for food imports, in the form of both grants and loans, which may have adversely affected the national production of several commodities (e.g., dairy products). 34. This situation calls for the intensification of efforts to analyze these issues in detail. The Bank's strategy of intervention in the sector is very much in line with the Governmont's evolving strategy as outlined above. Many of the issues identified in para. 33 were recently discussed with the Ministry of Agriculture, which has requested the Bank's assistance in addressing and hopefully solving these issues.9 E. Economic data 35. One other important area in which major improvements are necessary is data collection and reporting. The lack of timely and consistent data for key economic aggregates poses serious obstacles for both performance monitoring and informed analyses of policy issues. The Government should adopt an action program to produce more timely and accurate national accotmnts, government and public enterprise financial accounts, aid flows by end-use and reports on selected key indicators at the sectoral and project levels. This will require, inter alia, active coordination and cooperation among the Ninistry of Finance and Economy, the Ministry of Plan and the National Bank. Prospects 36. Rwanda's short-term economic prospects are considerably brighter than they appeared at the time of the economic mission, in September 1985. Due to the effects of a drought in Brazil, world coffee prices are projected to rise in 1986 to levels in excess of their previous peak levels of the late 19708, representing an increase of more than one third in a single year. As a result of this 'windfall' (approximately US$45 million in 1986, and US$15 million in 1987), Rwanda's overall balance of payments is projected to register a large overall surplus in 1986, followed by a saaller surplus in 1987; similarly, the government budget is projected to record a surplus of more than 1 percent of GDP in 1986. On the import side, the substantial decline in world petroleum prices will reduce import expenditures in 1986 by about US$8 million. 37. For Rwanda, these will be extremely welcome developments, as they should serve to further loosen some of the constraints under which the Rwandese economy has been forced to operate in recent years. Nonetheless, 9/A list of ongoing and programed studies in the agricultural sector is presented in Appendix 5.  xi_ they highlight once again the extent to which Rwanda's economy continues to be dominated by external factors, reflecting its continued dependence on a narrow export base. Any significant deviation in world coffee prices from their current projected values--in particular, a more rapid decline from peak 1986 prices than currently forecast--would likely imply a balance of payments scenario considerably less favorable than currently projected. 38. While providing some room for 'maneuver', it will be essential for the Government to bear in mind that the coffee windfall' of 1986-87 will be only temporary. This should allow it to avoid repeating its serious mistake during the previous coffee boom of the late 1970s, when temporary increases in revenues were used to finance levels of current expenditures which proved unsustainable once world coffee prices reverted to more normal levels. In particular, it is strongly recommended that the Government use this windfall to reduce the level of its outstanding domestic debt. Such a course of action will both provide protection against unsustainable increases in current expenditures and reduce the burden on the economy of future debt service payments on domestic debt. 39. Similarly, the temporary favorable situation should provide an opportunity for the Government to adopt a number of lmportant policy measures--some of which are outlined in this report--which will be necessary if Rwanda is to return to its previous high growth path. Continued prudent economic management, and the adoption of appropriate policy reforms where indicated, should lead to real GDP growth in the 4-5 percent range. In the agricultural sector, which will continue to account for 40 percent of overall output, annual growth rates of 4-5 percent seem realizable, thus allowing a continued modest increase in per capita output (as population growth is projected to be around 3.7 percent per annum). A similar growth rate is projected for the services sector, while growth in the manufacturing sector should be somewhat higher, in the 5-6 percent range. 40. Foreign exchange requirements for the level of imports associated with this projected growth do not appear to be a major constraint in the near-term. On the assumption that, as recommended above, the coffee windfall in 1986-87 is used to retire a part of the Government's domestic debt, international reserves should increase to nearly 5 months of imports in 1986, and would then be drawn down gradually from this high level over the remainder of the decade. Foreign aid Inflows, which will continue to finance nearly two thirds of the public investment program, are projected to average about US$180 million (in constant 1985 prices) over the period 1986-90, or about US$30 per capita. This represents a slight Increase compared to the 1985 aid inflow, primarily reflecting increased disbursements from multilateral aid institutions. While the major part of lending will continue to be project-oriented, there appears to be increasing scope for policy-based lending operations; particular areas in which policy-based lending could play an important role include industrial restructuring and public enterprise reform, and rehabilitation of the mining sector. Continued prudent debt management policies--in particular, the minimization of recourse to suppliers' credits at market terms--should keep the debt servico ratio at a manageable level.  I * NTRODUCTION 1. Since the last Country Economic Memorandum, the World Bank has increased substantially the level of its economic and sector work on Rwanda. Recent sector reports discussed with the Government have dealt with issues in the agriculture, education, energy and health sectors.1 This present economic memorandum addresses a number of issues of short and medium term macroeconomic management which have been raised by the Government in its 1985 report Proiet de proarame d'assainissement et de relance de l'economie rwandaise. Particular areas of reform, and areas in which the Government has requested World Bank assistance, include overall restructuring of the industrial sector--of which public enterprise rehabilitation would be a major component--and support for policy-based reform and rehabilitation of the mining sector. The Government has also requested Bank technical assistance in the preparation of its public investment program. These subjects, all related to issues of overall economic management, form the core of the present report. Organization and structure of the report 2. Chapter II provides a discussion of major recent economic developments. As a preface to this chapter, it is noted that the lack of timely and consistent data both complicate the task of informed policy- making and render hazardous to analysis of economic trends and structural developments. 3. Chapter III presents a discussion of a number of selected issues of macroeconomic management, beginning with the system of industrial incentives. The results of a survey conducted by the mission on economic efficiency in selected industrial activities are presented, and a number of policy recommendations are put forward to facilitate continued rapid growth in the industrial sector. 4. Following a brief discussion of the recommended approach for rehabilitation of the mining sector--whose activities have virtually ceased since the summer of 1985--Chapter III continues with a discussion of public sector management, focussing on: (i) overall issues of public finance; (ii) the need for a comprehensive public investment program; and (iii) the current difficulties faced by public enterprises. The chapter concludes with a discussion of the management of the balance of payments and external debt. 1/ Rwanda, Agricultural Strateav Review', Report No. 4635-RW, June 1985; Rwanda, Population, Health and Nutrition Sector Review, Report No. 4926- RW, August 1984; Rwanda. Education Sector Memorandum, Report No. 5276- RW, June 1985; Rwanda. The Manufacturing Sectors Performance and Policy Issues, Report No. 5302-RW, July 1985; and Joint UNDPIESMAP. Improved Charcoal Cookstove Stratety, October 1985.  -2- 5. Chapter IV offers a discussion of likely medium-term scenarios for both the external balance of payments and the public finances. As discussed throughout the report, developments in the short-term (1986-87) are almost certain to be dominated by the anticipated substantial rise in world coffee prices, a development which will present the Rwandese Government with a wide range of opportunities as well as challenges.  - 3 - II. RECENT ECONONIC DEVELOPHENTS A. Overview 6. As opposed to the period of high economic growth in 1977-81, available statistics suggest a stagnation in per capita income in 1982-84, followed by some recovery in 1985-86. Whereas Rwanda's accelerated growth in the second half of the seventies was aided by favorable external factors, these same factors adversely affected Rwanda's economic performance in the early 1980s: terms of trade deteriorated on average by about 20 percent in 1980 and 1981; coffee export tax receipts declined dramatically, as world coffee prices fell from their high levels of the late 70s; agricultural food production suffered from a severe drought in 1981.; and foreign aid flows declined in real terms during 1980-84. 7. These adverse external factors together with the Government's failure to realize that the coffee boom of the late 70s was a temporary phenomenon -- and therefore, current expenditures should not be unduly increased -- resulted in a significant deterioration in the balance-of- payments and budgetary situation. The Government acted in a timely fashion to arrest this deterioration and adopted -- in 1983 and 1984 -- austerity measures consisting mainly of budgetary restraint and import restrictions. Although these measures were successful in producing their intended effects by reducing current account and budgetary deficits in 1984, they seem to have had an adverse impact on economic growth, primarily by causing a slowdown in the tertiary sector. These measures have probably also caused some deterioration in the climate for private sector investment. It should be recognized, however, that the Government's tendency to move in the direction of more controls over the economy has essentially been a response to a crisis situation rather than to ideological and political forces. 8. Considerable progress has also been recorded in recent years in improving public sector efficiency and in introducing greater coherence in economic management. Interministerial coordinating committees have been established to ensure coordination among various institutions dealing with development policy; key technical ministries have been directed to formulate sectoral strategies; and the Government has prepared an economic recovery plan which calls for policy reforms in a number of major areas of economic management.2 B. Problems of economic data 9. A major difficulty in evaluating recent economic trends and policies in Rwanda arises from the serious problems of data availability and consistency. These problems are partly attributable to the fact that reporting of a number of key economic aggregates occurs only with a considerable delay. An even more serious problem arises from the fact that, in the absence of timely and comprehensive data, the alternative data sources which are available are often highly inconsistent. 2/ Proiet de proRramme d'assainiasement et de relance de l';conomle rwandaise, MINIFINECO, August 1985.  - 4 - 10. These problems are particularly acute for data concerning national income accounts and agricultural production. Until 1978, the Ministry of Plan provided national accounts estimates in both current and constant prices. Since that time, however, no sectoral defletors have been provided, leading to a situation in which there are currently no official national income figures in constant prices. To fill this gap various Government and outside entities (e.g., IMF, World Bank) have estimated sectoral GDP deflators, leading to a number of widely-differing estimates of output in real terms. 11. To provide an indication of the quantitative significance of these discrepancies, the evolution of GDP over the period 1980-84 (in real terms) according to 6 alternative sources3 is shown below. Table 2.1:Comparison of Alternative Estimates for GDP Growth Rates, 1980-84 (Annual percentage change of GDP) 1980 1981 1982 1983 1984 1. Ministry of Plan 7.0 5.1 1.8 0.0 . 2. Ministry of Finance .. .. .. 5.8 4.6 3. National Bank 4.9 1.2 1.5 2.0 -1.5 4. Programme de Relance 3.5 5.2 -4.6 0.6 . 5. President's speech .. .. .. 0.6 4.6 6a.World Bank (factor 5.8 9.0 2.8 2.5 -4.3 cost) b.World Bank (market 10.7 10.3 0.9 1.0 0.5 price) For each year shown in the table, there is a wide range in reported GDP growth rates. The particularly large discrepancy reported for 1984--nearly 9 percentage points--is attributable primarily to the large differences in reported production of the agricultural sector, which range from an increase of 5.5 percent (Ministry of Finance and Economy) to a decline of 3/ (i) estimates provided by the Ministry of Plan, calculated using the observed least-squares relationship over the 1970-78 period between the overall consumer price index and individual sectoral deflators; (ii) figures reported by the Ministry of Finance and Economy (MINIFINECO) in its annual report Economic Situation of Rwanda; (iii) figures provided by the National Bank of Rwanda, whose figures are accepted as 'official" by the IMF in its reports; (iv) figures reported in the Government's Prolet de programme d'assainissement et de relance de l'economie rwandaise, the document which is serving as the basis of the Government's program to revitalize the economy; (v) figures cited in the President's December 1985 address to the Party Congress; and (vi) figures prepared by the mission based on information gathered during the economic mission and a follow-up visit in November 1985.  nearly 15 percent (World Bank mission and National Bank figures). While the discrepancies among GDP growth rates for other years could be attributed largely to the use of different sectoral deflators, in 1984 the difference for the agricultural sector reflects not only a significant divergence in the implied agricultural deflators (ranging from 9 percent to 30 percent) but also major discrepancies in physical output data.4 12. While these differences in agricultural output data can be explained to some extent by various methodological factors5 they nonetheless complicate considerably the task of describing and analyzing recent economic developments. The analysis presented in this paper is for the most part based on the national account figures estimated by the mission, although there remain a number of important anomalies to be resolved. It should be borne in mind, however, that in view of the severe data problems, the analysis of recent economic developments is of necessity only tentative and potentially subject to revisions. In this regard, the differing accounts of developments in 1983 and 1984 are particularly significant: the Government's action program outlined in its Programme de Relance is based on the assumption of stagnating (or declining) output, while the figures cited by the Ministry of Finance and Economy in its annual report show continued healthy growth rates for both 1983 and 1984. 13. It is clear that more complete and reliable statistics are indispensable for performance monitoring and for informed analyses of policy issues. An action program is needed to produce more timely and accurate national accounts (both in current and constant prices), government and public enterprise financial accounts, aid flows by end-use and reports on selected key indicators at the sectoral and project levels. In this respect, more cooperation and coordination are needed between the Ministry of Finance and Economy, and the Ministry of Plan, as well as the National Bank. C. Economic Developments: 1980-85 External sector 14. As in previous years, recent economic developments have continued to be under the strong influence of developments in the external sector, primarily changes in the terms of trade. Table 2.2 below presents information on the evolution of export and import unit values, and the implied terms of trade, over the period 1977-85. Perhaps the most striking point is that in only one of the nine years (1983) was the variation in the terms of trade less than 10 percent, while in four of the years it was 20 percent or higher. The extreme volatility in export (and to a lesser extent, import) Import unit values was a principal factor underlying the three major phases in the balance of payments over the past 4/ Reported differences in output for bananas alone account from more than 4 percent of GDP, while bananas, sweet potatoes and manioc together account for a difference of nearly 7 percent of GDP. 5/ Appendix 4 provides a brief description of the methodologies underlying different methods of estimating agricultural output.  - 6 - decade, namelys (i) the large (overall) balance of payments surpluses recorded in the late 19709, which led to a ten-fold increase in international reserves; (ii) the balance of payments deficits recorded in the early 1980s, when coffee prices fell by more than one third; and (iii) the balance of payments surpluses recorded in 1984-85. Table 2.2: External Trade Indice". 197748 1977 1978 1979 1980 1981 1982 1988 1984 1905 (1980 - 100) Export unit value 118.8 96.8 120.8 100.0 84.9 92.0 94.0 118.7 104.2 Coffee 181.5 100.0 128.8 100.0 80.0 95.8 92.8 112.5 110.6 Import unit value 71.0 84.6 90.8 100.0 95.1 91.1 90.2 84.7 88.4 Term of Tra4d 167.i 114.8 182.9 100.0 89.8 101.0 104.2 ia4.6 122.0 ($nnual Rates of Chong* (7)) Export unit value 76.8 -18.4 24.8 -17.2 -16.1 8.4 2.2 28.1 -..9 Coffe 97.2 -20.9 2S.5 -19.0 -20.0 19.7 -8.7 21.9 -1.7 Import unit value 10.0 19.8 7.3 10.1 -4.9 -4.2 -1.0 -6.1 0.8 Term, of Trade 60.8 -81.6 16.8 -24.8 -10.7 13.1 8.2 81.1 -10.7 Forandus Ite COP (market price) .. .. .. 10.7 10.8 0.9 1.0 0.5 0DY 7 .. .. .. 6.1 7.7 2.2 1.4 8.4 A/ GDP at mrket price. adjusted for chang" in term of trade.