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Rwanda’s Debt Sustainability Analysis – August 2014

Risk of external debt distress: Low

Augmented by significant risks stemming from domestic public and/or private external debt?

No

Rwanda’s debt stock continues to remain sustainable. As of December 2013, the country has a low risk rating associated with its external debt, in part because of improved prospects for exports, prudent debt and macroeconomic management, and a strong Country Policy and Institutional Assessment (CPIA) score. All of these reasons contributed to a total public debt stock in 2013 equaling just over US$2 billion, or 27.4 per cent of GDP, with the majority of this classified as concessional. A US$ 400 million Eurobond issued in April 2013 demonstrated Rwanda’s commitment to seeking alternative financing to traditional donor funding and investors’ response to it signaled trust in Rwanda’s creditworthiness. Domestic debt equaled 6.3 per cent of GDP by end-2013, an increase of 0.9 percentage points from 2012. Going forward, the main risk to debt sustainability will be servicing more expensive forms of debt, such as commercial borrowing, which may be contracted in order to advance key infrastructure projects.

A. Background

The total stock of public debt increased in 2013 by 4.7 percentage points of GDP, mainly as a result of the Eurobond issue in April 2013 and due to lower than expected economic growth for the year (9.7 per cent nominal GDP growth realised as opposed to 12.9 per cent forecast).

The total stock is now just over US$ 2 billion, which represents 27.4 per cent of GDP. This remains the lowest debt/GDP ratio in the region (see Figure 1). The majority of this is external debt i.e. debt owed to foreign creditors, such as multilateral institutions or overseas Eurobond investors. Domestic debt – which represents 22.9 per cent of total public debt – increased in 2013 due to the Government’s cash flow needs, as the impact of the 2012 aid shock persisted into the next calendar year. Government guaranteed external debt declined in 2013 as RwandAir and the Kigali Convention Centre successfully paid back expensive commercial loans. Guaranteed domestic debt increased due to the Energy, Water and Sanitation Authority (EWSA) increasing its loan facility with Bank of Kigali.

The scope of public debt for the purposes of this Debt Sustainability Analysis (DSA) is external and domestic debt contracted and guaranteed by central government. Table 1 highlights the important components of Rwanda’s current public debt stock and provides an estimate for 2014. Very little change is expected compared to 2013.

Note that private sector external debt in Rwanda remains at low levels: it equaled 5.4 per cent of GDP in 2013 as opposed to 6.0 per cent in 2012. The vast majority of this is long-term debt.

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Figure 1: Public debt in the East African Community in 2013

Kenya Tanzania Uganda Burundi Rwanda0

10

20

30

40

50

60Pu

blic

debt

as %

GDP

Source: WEO April 2014, MINECOFIN

Table 1: total public debt in Rwanda, 2012 – 20142012 2013 2014 (estimate)

Stock

(USD

mn)

% GD

P

% share of

total debt

Stock

(USD

mn)

% GD

P

% share of

total debt

Stock

(USD mn)

% GD

P

% share

of total debt

Total Public Debt 1651 22.6

100.0

2079 27.4

100.0

2245 27.7 100.0External Debt 1259 17.

376.2 1602 21.

177.1 1709 21.1 76.1

Government 1062 14.6

64.3 1555 20.5

74.8 1655 20.4 73.7i. Multilateral 891 12.

253.9 939 12.

445.2 990 12.2 44.1

ii. Official Bilateral 172 2.4 10.4 216 2.8 10.4 265 3.3 11.8iii. Commercial 0 0.0 0.0 400 5.3 19.2 400 4.9 17.8

Guaranteed by central govt 196 2.7 11.9 47 0.6 2.2 54 0.7 2.4Domestic Debt 393 5.4 23.8 477 6.3 22.9 536 6.6 23.9of which guaranteed 5 0.1 0.3 11 0.1 0.5 10 0.1 0.4

Nominal GDP (RWF billion) 4479 4915 5406Exchange rate (period average)

614 647 666Nominal GDP (US million) 7291 7601 8116Note: Table 1 follows the definition of debt agreed in the IMF Policy Support Instrument (PSI) with Rwanda. However, the definition of debt provided in the IMF Government Finance Statistics 2014 Manual – which will be the guideline used by the East African Community for government macroeconomic statistics in the future - excludes guarantees from the definition of debt until the guaranteed entity actually defaults. Although Table 1 includes guarantees, in line with the definition in Rwanda’s current PSI, these do not represent guaranteed entities that have already defaulted but guaranteed entities that may default in future.

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Figure 2 shows the share of different kinds of debt in GDP and in total public debt. Bilateral and domestic debt as a share of GDP increases over time. This is because the Government aims to diversify its set of lenders; for example, it is very committed to exploring partnerships with emerging market Exim banks. The increase in domestic debt reflects, in part, the Government’s agenda to expand local capital markets along with funding shortfalls for the FY2012/13 budget.

The change in shares of the total debt stock mainly reflect the change from reliance on multilateral lenders to more market driven solutions such as commercial lending. Nevertheless, multilateral lenders, who provide highly concessional loans, will remain the majority holder of Rwandan public debt for the foreseeable future. The change in total debt shares needs to be managed carefully as different creditors have different priorities and different tolerance levels for sudden changes in Rwanda’s macroeconomic outlook.

Figure 2: shares of components of debt in GDP and total public and publically guaranteed debt

0 20 40 60

Multilateral

Bilateral

Commercial

Govt guaranteed

Domestic

% share in total debt

2014 (estimate) 2013 2012

Total debt service in 2013 equalled $55.2 million (4.5 per cent of exports of goods and services in Table 2). The largest share of the servicing was accounted for by interest repayment on the Eurobond. Going forward, debt servicing will be slightly higher than in the past due to these interest repayments ($26.5 million a year until 2023) but will still remain well within sustainable levels, given the current macroeconomic outlook. However, a repayment risk does arise in 2023, when the principal on the Eurobond falls due. In 2014, servicing is estimated to equal 4.9 per cent of exports and 4.4 per cent of revenue; similar ratios are also estimated to apply in the medium-term.

Table 2: servicing of external public debt, 2012 - 20142012 2013 2014

(estimate)Amortization schedule (USD million) 17.3 19.3 22.6Interest repayment schedule (USD million) 9.2 33.0 39.1Total debt service (USD million) 26.5 52.2 61.7Liquidity analysis

Debt service (% exported goods and services) 2.6 4.5 4.9

3

0 5 10 15

Multilateral

Bilateral

Commercial

Govt guaranteed

Domestic

% GDP

Debt service (% government revenue, excluding grants) 2.3 4.2 4.4

B. Underlying Assumptions

Box 1: the cautious macroeconomic framework for the DSA

Box 2: the optimistic macroeconomic framework for the DSA

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Growth: long run real GDP growth is projected at 6.0 per cent. This is lower than growth estimated in Rwanda’s current PSI (7.5 per cent) and is based on the cautious assumption that export growth will be lower than previously forecast.

Inflation: inflation is expected to remain contained. In the medium and long term it is projected at 4.7 per cent, just under BNR’s medium-term target of 5.0 per cent.

External sector: the export of goods and services is projected to gradually rise from 15.4 per cent of GDP in 2013 to 18.0 per cent by the end of 2034, as a result of the promotion of non-traditional exports such as milling products and conference services. This reflects an annual average growth rate of 9.0 per cent, lower than average growth in the past as it is cautiously assumed that infrastructural bottlenecks and non-tariff barriers dampen potential growth. Import growth is high in the near-term, reflecting investment in key infrastructural projects (average growth of 8.6 per cent in 2014-2019). However, it will then slow down, growing on average by 6.0 per cent a year in the medium and long-term, reflecting the fact that domestic demand may not be as buoyant as it has been in the past and that government capital expenditure is projected to slow down.

Fiscal balances: there will be a consistent effort to mobilise domestic revenues, meaning revenue excluding grants will increase from 16.3 in 2013 to 21.4 per cent of GDP by the end of the period. Grants will steadily taper down over the period, equaling less than 1 per cent of GDP by 2034. Total public expenditure will decline from 30.1 to 25.0 per cent of GDP, reflecting the slowdown in capital expenditure in the long term.

Domestic borrowing: domestic borrowing is assumed to increase by the domestic financing need in 2014 – 2016 (which is at a level within the current PSI limit) and then to equal 1 per cent of GDP a year in the medium and long-term, as the government faces an ongoing need to finance the budget. No further domestic guarantees are assumed.

External concessional borrowing: the 2014-2019 estimates rely on data from Treasury on current projects. After this, the stock of bilateral loans is expected to increase by 8 per cent a year, as Rwanda’s low risk rating opens up new funding opportunities. The stock of multilateral loans is consistent with the recent IDA-17 allocation, historical disbursement levels and projected USD inflation. This DSA makes no assumption on when Rwanda becomes a ‘blend’ country (i.e. when it will be able to access IBRD loans, which are less concessional than IDA loans).

External non-concessional borrowing: Rwanda’s second PSI currently has a ceiling on non-concessional external borrowing of $250 million. Approximately $230 million of this is still available as of July 2014. The framework assumes a new 10 year Eurobond for various infrastructure projects, including RwandAir expansion, of $200 million in 2015, with an interest rate of 8.5 per cent and a grace period of one year. No further external guarantees are assumed.

Growth: long run real GDP growth is projected at 7.5 per cent, and will be driven by export growth.

Inflation: no change to cautious macroeconomic framework.

External sector: the export of goods and services is projected to gradually rise from 15.4 per cent of GDP in 2013 to 19.4 per cent by the end of 2034, reflecting an annual average growth rate of 10.7 per cent, lower than average growth in the past, but higher than the

Box 3: comparison of the cautious macroeconomic framework with the previous MINECOFIN DSA

November 2013 July 2014

Cautious

July 2014

Optimistic

More cautious growth outlook

Real GDP growth of 7.5 per cent in medium and long

Real GDP growth of 6.0 per cent in medium and

Real GDP growth of 7.5 per cent in medium and long

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Growth: long run real GDP growth is projected at 7.5 per cent, and will be driven by export growth.

Inflation: no change to cautious macroeconomic framework.

External sector: the export of goods and services is projected to gradually rise from 15.4 per cent of GDP in 2013 to 19.4 per cent by the end of 2034, reflecting an annual average growth rate of 10.7 per cent, lower than average growth in the past, but higher than the

term (reflecting PSI agenda).

long term. term.

Similar growth in exports but greater leakage through imports

8.5 per cent growth in exports in medium and long term.

9.0 per cent growth in exports in medium and long term. Import growth is higher.

10.7 per cent growth in exports in medium and long term. Import growth is higher.

Composition of public financing is different

Grants remain a key part of financing until the end of the period. Revenues are 16.8 per cent of GDP by 2034.

Tapering down of grants and revenue gradually increases to 21.4 per cent of GDP in 2034. Capital expenditure growth is lower than in the past.

Slower tapering down of grants and revenue increases to 23.0 per cent of GDP in 2034.

Level of concessional debt is broadly similar but timing changes

New debt is disbursed more toward the end of the period.

More new debt is disbursed in the short and medium term. A new Eurobond is issued in 2015 for $200 million (reflecting the new PSI).

No change with cautious macroeconomic framework.

PV External Public Debt to GDP

2014

2024

2034

16.7

7.8

9.1

14.6

15.3

11.6

14.6

14.1

9.4

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C. External DSA

The External DSA firstly uses the cautious macroeconomic framework. Based on a twenty year horizon, it shows that Rwanda’s external public and publically guaranteed debt outlook is sustainable from 2014 (first year of projection) through 2034. None of the sustainability indicators in Figure 3 breach the thresholds in the baseline scenario (the most realistic scenario).1 There is one breach in the most extreme shock scenario but on closer analysis - which accounts for Rwanda’s strong CPIA score – this is not deemed problematic. As none of the thresholds are breached, Rwanda retains its low risk status, which effectively demonstrates it is a creditworthy sovereign.

This external risk rating is crucial for determining Rwanda’s limit on external non-concessional borrowing, as negotiated in the IMF Policy Support Instrument (PSI), and also determines the mix of loans and grants Rwanda receives from the World Bank. The IMF/World Bank DSA conducted in late 2013 saw the external risk rating change from moderate to low, and this means that going forward Rwanda will receive IDA loans only, rather than a mix of loans and grants as previously. In addition, certain bilateral donors are more likely to provide loans to Rwanda, given its new low-risk rating.

Table 3 below sets out the evolution of key debt sustainability baseline indicators going forward. Although the debt service to exports threshold only applies to the debt service of public and publically guaranteed debt, it is worth noting that including the private sector does not place an undue burden on the ability of exports to generate the forex needed to service debt: over the whole period, the average ratio would be 9.8 per cent if the private sector’s external debt were included, still well below the threshold.

Table 3: solvency and liquidity baseline indicators from the DSA, using cautious macroframework

Indicators201

4201

5201

6201

7201

8 …202

3202

4203

4Thresh

oldPV Debt-to-GDP 14.

617.5 17.9 17.5 17.2 15.

715.

311.

650.0

PV Debt-to-Exports 93.6

114.7

117.3

115.9

114.8

98.8

95.7

64.9

200.0Debt service-to-exports

5.8 6.5 6.6 7.6 7.0 20.4

5.3 4.6 25.0Debt service-to-revenue

5.3 5.5 5.3 6.0 5.3 15.4

4.0 3.9 22.0Note: 2014 estimates differ slightly compared to Table 2 as the DSA tool includes the servicing of guaranteed debt. In reality, the central government will not service this debt unless the guaranteed entity defaults.

Figures 3b) to 3d) show that the present value of debt to various solvency indicators (GDP, exports and revenue) is expected to increase in the medium-term, before declining in the long-term. Looking at the extreme shocks for these figures, the solvency indicators are in no danger of breaching the threshold throughout the time period. This is because Rwanda currently has quite a low debt-to-GDP figure, 1 The thresholds for the debt sustainability tests (on solvency and liquidity) are based on Rwanda’s Country Policy and Institutional Assessment (CPIA) score which for this DSA assessment was 3.8. This makes Rwanda a ‘strong’ policy performer. But as of June 2014, Rwanda’s score actually increased to 3.9, the joint highest in Africa.

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after debt cancellation in the mid-2000s, and because careful debt management will ensure that additions to the stock remain in line with GDP growth forecasts and will be as concessional as possible. Whereas in the past, the PV Debt-to-Exports indicator was regularly breached under the most extreme shock, this is no longer the case today due to a wider export base and improving prospects for growth and diversification.

The liquidity indicator of debt service-to-exports in Figure 3 e) does not breach the threshold under either the baseline (most realistic case) or under an extreme shock, but debt service-to-revenue in Figure 3 f) gives some cause for concern. The baseline (the blue line) does not breach the threshold but an extreme shock to the exchange rate would result in the threshold being near-breached in 2023 (the year the Eurobond will be repaid).

This is known as a borderline case in the DSA framework, and necessitates closer analysis. The thresholds for breaches are based on countries having a CPIA score above a particular floor, but they do not take into account an individual country’s score. Probability analysis that does account for Rwanda’s score - which is well above the floor for the threshold associated with a strong CPIA rating – shows that a shock will not cause a breach in the threshold (Figure 4). Nevertheless, the analysis highlights the risks when large debt repayments are due (and large annual repayments are more likely to occur as Rwanda increases its non-concessional borrowing). The analysis strongly suggests that Rwanda must focus its revenue and export mobilisation efforts with the 2023 Eurobond repayment clearly in mind. It also suggests that bullet repayments of any kind need to be monitored carefully in the future.

The table of inputs and results for the External DSA is presented in Table 5.

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c.PV of debt-to-exports ratio

Figure 3: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014-2034: Cautious Macroeconomic Framework

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2014 2019 2024 2029 2034

d.PV of debt-to-revenue ratio

Baseline Historical scenario Most extreme shock 1/Threshold

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to an exports shock and in figure f. to a one-time depreciation shock.

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b.PV of debt-to GDP ratio

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f .Debt service-to-revenue ratio

Figure 4: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014-2034: Cautious Macroeconomic Framework

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D. Public DSA

Public debt includes both the external and domestic debt contracted or guaranteed by central government. This Public DSA uses the cautious macroeconomic framework. Domestic public and publically guaranteed debt remains low, equaling 6.3 per cent of GDP in 2013. By the end of the period it is projected to have increased to 9.4 per cent of GDP with its maturity composition becoming more long-term as the government seeks to develop local capital markets. Its level by the end of the time period incorporates the assumption that domestic debt increases by 1 per cent of GDP a year in the medium and long-term (which is the limit under the current PSI).

The results of the Public DSA can highlight broader vulnerabilities, which may have implications for macroeconomic policy. There is no risk rating associated with the Public DSA but its results can be used in general policy discussions.

For Rwanda, the present value of public debt to GDP does not change dramatically in the baseline case over 2014-2034 (Figure 5a). An adverse economic shock would cause an increase in the near-term but the ratio would then decline again over time. Looking at the alternative scenario where the primary balance is fixed at the level in 2014, the indicator is higher but still far below the benchmark. It should be noted that 2014 is an unusual year to hold fixed as Rwanda is still adjusting to the 2012 aid shock (the 2014 primary deficit is forecast as 4.0 per cent of GDP, whereas the historical average for the previous ten years was 0.3 per cent of GDP).

The other solvency ratio, the present value of public debt to revenue, follows a similar pattern (Figure 5b). For debt servicing, the profile is comparable to the External DSA, with Eurobond repayments sharply increasing the burden (Figure 5c).

The table of inputs and results for the Public DSA is presented in Table 6. None of the three key indicators suggest that the overall risk of debt distress is any higher than when external debt is analysed in isolation.

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Figure 5: Indicators of Public Debt under Alternative Scenarios, 2014-2034: Cautious Macroeconomic Framework

a. PV of Debt-to-GDP Ratio

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

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2029

2030

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2034

01020304050607080

b. PV of Debt-to-Revenue (including grants) Ratio

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2017

2018

2019

2020

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2023

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1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.

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E. Results from the External DSA using the optimistic macroeconomic framework

This section uses the optimistic macroeconomic framework assumptions (see Box 2). To recap, this broadly means that economic and export growth are higher in the future and that the government’s revenue mobilisation efforts are more successful. The baseline scenario under the optimistic framework does not materially change the picture for debt sustainability compared to the cautious framework. The critical difference compared to the cautious framework is that, under the most extreme shock scenario, the debt service-to-revenue ratio is no longer a borderline case. This implies that if strong revenue mobilisation does materialise, and an adverse economic shock also occurs (in this case depreciation), then Rwanda’s debt servicing obligations are not at risk of being left unmet, particularly in years when there are bullet repayments.

As the baseline scenario for both macroeconomic frameworks is broadly similar, a comparison between the most extreme shocks for the debt service-to-revenue liquidity indicator is presented in Figure 6 instead.

Figure 6: Indicators of Public and Publicly Guaranteed External Debt under the Most Extreme Scenario, 2014-2034

Debt service-to-revenue

20142015

20162017

20182019

20202021

20222023

20242025

20262027

20282029

20302031

20322033

203402468

101214161820222426

Threshold Optimistic frameworkCautious framework

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F. Scenario-building: additional borrowing in the medium-term

Rwanda has an ambitious development agenda. There are key national and regional projects that the Government deems essential in the medium-term to boost growth and enhance trade links with the region. This section undertakes some scenario-building to see how the debt sustainability indicators will respond to these. Analysis was undertaken for both the cautious and optimistic macroeconomic framework but only the cautious framework is discussed here as results for both are broadly similar (highlighting, incidentally, that a couple of percentage points’ difference in export and GDP growth rates is not as important as the amount and composition of new external debt).2

The total cost of implementing these projects is currently estimated at US$ 2.6 billion. To put this in perspective, if central government fully financed these projects, it would result in Rwanda more than doubling its public debt stock in the space of six years. Three scenarios are presented:

S1. The full cost is met by concessional borrowing;

S2. The full cost is met by a mix of non-concessional and concessional borrowing (2:1 ratio);

S3. Some of the cost is met by the private sector and $1.1 billion is met by the government (again, a 2:1 ratio of non-concessional to concessional borrowing).

Table 4 sets out the proposed debt instruments and time-frame for Scenario 2 as an illustration. All three scenarios follow the same time-frame i.e. full disbursement of funds by 2020.

Table 4: proposed projects and debt instruments in the medium-term under Scenario 2

Time frame Total AmountDebt instrument Start

disbursement End disbursement USD millionNon-concessional bond I 2015 2015 1000Non-concessional bond II 2018 2018 500Commercial loan 2016 2016 200Bilateral semi-concessional

2016 2020 200Multilateral concessional I

2016 2020 200Multilateral concessional II

2018 2020 500Total Amount 2600

Note: the concessional and semi-concessional instruments assume loan terms identical to instruments already in Rwanda’s debt portfolio and that a constant fraction of the loan is disbursed each year. The

2 Note that both the cautious and optimistic macroeconomic frameworks do not adjust to the inclusion of these projects as the DSA tool is not designed to allow such macroeconomic ‘feedback effects’. This means that the indicators produced in the following charts are most likely biased upward. In reality such large projects would probably lower the solvency and liquidity indicators as GDP, exports and revenue grow faster over time as aggregate demand is stimulated by this large boost to investment and infrastructure.

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non-concessional bonds are assumed to be for 10 years, with a grace period of 1 year and an interest rate of 8.5%. The commercial loan is assumed to be for 6 years, with a grace period of 1 year and an interest rate of 6%.Figure 7 shows the results for Scenario 1, when all projects are financed by concessional loans. Here, an extreme macroeconomic shock would cause a threshold breach for the PV debt-to-exports solvency indicator and to the debt service-to-exports and debt service-to-revenue liquidity indicators. However the baseline case (the blue line), which is considered the most realistic outcome, does not breach the threshold. The result suggests that the government should negotiate hard to obtain concessional loans to meet its ambitious development needs as they of course represent the least risky option for external debt sustainability.

However, obtaining the full sum of US$ 2.6 billion from concessional sources may not be feasible. Therefore, Scenario 2 includes a mix of non-concessional debt sources too. Figure 8 shows the results. Using a 2:1 ratio of non-concessional and concessional debt results in threshold breaches, both under the baseline and an extreme shock, for one solvency indicator (PV debt-to-exports) and for both liquidity indicators. The solvency breach occurs over 2015 - 2018, when new non-concessional bonds would be issued. The liquidity breaches occur as a result of Rwanda’s current debt profile; as the 2013 Eurobond requires a bullet repayment in 2023, debt repayments in this year will necessarily be sensitive to the addition of new debt servicing.

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Figure 7: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014-2034: Scenario 1 (US$2.6 billion in new concessional debt)

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time depreciation shock; in c. to a terms shock; in d. to a one-time depreciation shock; in e. to a terms shock and in figure f. to a one-time depreciation shock.

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Figure 8: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014-2034: Scenario 2 (US$2.6 billion in new non-concessional and concessional debt)


Figure 9: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014-2034: Scenario 3 (US$1.1 billion in new non-concessional and concessional debt)

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1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to a terms shock and in figure f. to a one-time depreciation shock.

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The results in Figure 8 beg a re-analysis of the maximum amount of new debt that the government can sustain for these projects. Figure 9 shows results for Scenario 3, which assumes some private sector financing, meaning that the total stock of new public debt reduces to US$ 1.1 billion. The 2:1 ratio of non-concessional to concessional borrowing remains the same. Here, the PV debt-to-exports threshold is not breached and the liquidity thresholds are only breached when there is an adverse shock to the terms of trade or the exchange rate.

Comparing the three scenarios, it is clear that the third is the most desirable as it involves both the least amount of new public debt and also the least risk in terms of debt servicing (although the risk involved in debt servicing in Scenario 1 is reasonably comparable). Financing the country’s medium-term development needs will require strong engagement with traditional development partners as well as the private sector (in the form of a project investor or a government bond investor). The reduction in the public burden of new debt from US$ 2.6 to US$ 1.1 billion in Scenario 3 is only feasible if the private sector thinks the projects will generate a high return for their investment.

Figure 10 takes a key liquidity indicator – debt service-to-revenue – and compares it across the three project scenarios. The difference between servicing debt in the lowest cost scenario (Scenario 3) and the highest cost (Scenario 2) across the whole time period equals US$ 1.6 billion (which is roughly 20 per cent of GDP in 2013). This shows the kind of saving that the government can make if the private sector is brought on board to finance key projects.

Figure 10: debt service-to-revenue ratio by scenario

20142015

20162017

20182019

20202021

20222023

20242025

20262027

20282029

20302031

20322033

20340

5

10

15

20

25

Scenario 1 Scenario 2 Scenario 3

The lesson from the scenario-building is that Rwanda certainly has space to fund its ambitious national and regional projects but that this space is not limitless. To fund key projects approximately US$ 1.1 billion may be added in the medium-term without risking debt sustainability, and this assumes the private sector also directly invests in these projects. This total assumes a roughly two-to-one ratio of non-concessional to concessional debt. The total debt space available would increase if the ratio was reduced in favour of more concessional

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debt. The result holds for both the cautious and the optimistic macroeconomic framework.

G. Conclusion

Rwanda’s debt stock remains low and is sustainable under different scenarios for 2014-2034. Given the results of the External DSA, Rwanda’s external risk rating remains low. The debt stock will increase in line with Rwanda’s development needs but with due regard to Rwanda’s economic growth and ability to pay. The main risk emerging from the analysis is the debt servicing of commercial debt. While it may be possible to roll over this debt, the interest rate is not guaranteed to remain stable. Mitigation of the risk is possible by careful debt management, seeking alternatives to fully non-concessional borrowing, and importantly also by strong growth in exports. Diversification of the export base along with overcoming significant barriers to trade (such as the cost of electricity and transport) will improve Rwanda’s debt sustainability in the future, other things equal. In addition, strong growth in domestic revenue will ease the fiscal pressure for domestic and external loans.

Scenario-building where Rwanda contracts substantially more external debt in 2016-2020, in order to fund key infrastructure projects, indicates that the maximum new debt space available – assuming direct private sector investment in the projects - is approximately $1.1 billion before risks emerge.

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Table 5: External Debt Sustainability Framework Baseline Scenario, 2013 – 2034, for the cautious macroeconomic framework (in percent of GDP, unless otherwise stated)

Note: the debt stock estimates in 2013 and 2014 differ to the estimates in Table 1 due to different currency conversion methodologies.

Table 6: Public Debt Sustainability Framework Baseline Scenario, 2011 – 2034, for the cautious macroeconomic framework (in percent of GDP, unless otherwise stated)

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Historical 6/ Standard 6/

Average Deviation 2014-2019 2020-20342013 2014 2015 2016 2017 2018 2019 Average 2024 2034 Average

External debt (nominal) 1/ 27.2 28.1 31.2 32.4 32.4 32.4 31.8 29.6 22.6 27.7of which: public and publicly guaranteed (PPG) 21.8 22.4 25.5 26.7 26.8 26.8 26.1 24.4 18.2 22.7

Change in external debt 4.9 0.9 3.1 1.2 0.012 0.0 -0.6 -0.5 -0.7Identified net debt-creating flows 4.2 5.9 3.9 3.0 2.5 3.1 3.8 1.6 -1.1

Non-interest current account deficit 6.4 4.6 2.8 9.4 8.5 8.1 8.8 9.4 10.1 8.9 4.9 7.7Deficit in balance of goods and services 16.7 19.0 17.5 16.6 16.5 16.3 16.5 13.1 6.7

Exports 15.4 12.0 2.1 15.6 15.2 15.2 15.1 15.0 15.1 16.0 18.0 16.6Imports 32.1 28.6 3.4 34.6 32.7 31.8 31.6 31.2 31.6 29.1 24.7 27.8

Net current transfers (negative = inflow) -11.2 -10.7 -10.0 -9.1 -8.3 -7.5 -6.9 -4.6 -2.0of which: official -8.8 -8.4 -7.7 -6.9 -6.2 -5.5 -5.0 -3.1 -1.2

Other current account flows (negative = net inflow) 0.9 1.1 1.0 0.6 0.6 0.6 0.5 0.4 0.3Net FDI (negative = inflow) -2.0 -1.5 0.8 -2.5 -3.5 -4.0 -5.0 -5.0 -5.0 -6.0 -5.0 -5.3Endogenous debt dynamics 2/ -0.3 -1.0 -1.1 -1.1 -1.3 -1.3 -1.3 -1.3 -1.0

Contribution from nominal interest rate 0.6 0.5 0.6 0.7 0.6 0.6 0.5 0.4 0.3Contribution from real GDP growth -1.0 -1.5 -1.7 -1.8 -1.9 -1.9 -1.8 -1.7 -1.3Contribution from price and exchange rate changes 0.1 … … … … … … … …

Residual (3-4) 3/ 0.7 -5.0 -0.8 -1.8 -2.5 -3.1 -4.4 -2.1 0.4of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PV of external debt 4/ 20.1 20.3 23.1 23.5 23.1 22.7 22.2 20.5 16.0In percent of exports 130.8 129.9 151.8 154.4 153.0 151.9 146.7 128.0 89.3

PV of PPG external debt 14.8 14.6 17.5 17.9 17.5 17.2 16.6 15.3 11.6In percent of exports 96.1 93.6 114.7 117.3 115.9 114.8 109.6 95.7 64.9In percent of government revenues 91.0 84.7 96.8 94.2 90.6 86.9 82.7 72.8 54.4

Debt service-to-exports ratio (in percent) 8.8 9.4 10.1 10.2 11.2 10.6 10.1 8.4 7.0PPG debt service-to-exports ratio (in percent) 4.5 5.8 6.5 6.6 7.6 7.0 6.5 5.3 4.6PPG debt service-to-revenue ratio (in percent) 4.2 5.3 5.5 5.3 6.0 5.3 4.9 4.0 3.9Total gross financing need (Billions of U.S. dollars) 0.5 0.7 0.6 0.6 0.6 0.7 0.9 0.8 0.5Non-interest current account deficit that stabilizes debt ratio 1.5 8.5 5.4 6.9 8.8 9.4 10.6 9.4 5.7Key macroeconomic assumptions

Real GDP growth (in percent) 4.6 7.7 1.9 6.0 6.7 6.2 6.4 6.3 6.0 6.3 6.0 6.0 6.0GDP deflator in US dollar terms (change in percent) -0.3 7.1 5.2 0.7 2.5 2.7 3.0 3.7 1.7 2.4 1.7 1.7 1.7Effective interest rate (percent) 5/ 3.0 4.0 2.0 2.1 2.3 2.3 2.1 2.0 1.8 2.1 1.4 1.2 1.4Growth of exports of G&S (US dollar terms, in percent) 15.8 25.8 23.6 8.3 6.6 9.0 9.0 9.0 9.0 8.5 9.0 9.0 9.0Growth of imports of G&S (US dollar terms, in percent) 3.3 19.4 13.9 15.1 3.2 6.0 9.0 9.0 9.0 8.6 6.0 6.0 6.0Grant element of new public sector borrowing (in percent) ... ... ... 46.1 20.8 45.9 47.3 50.0 53.6 44.0 48.2 43.9 40.9Government revenues (excluding grants, in percent of GDP) 16.3 17.3 18.0 19.0 19.4 19.8 20.1 21.1 21.4 21.1Aid flows (in Billions of US dollars) 7/ 0.7 0.9 0.9 0.9 0.9 0.9 0.8 0.7 0.6 0.6

of which: Grants 0.7 0.8 0.7 0.7 0.7 0.6 0.6 0.5 0.3of which: Concessional loans 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3

Grant-equivalent financing (in percent of GDP) 8/ ... 10.5 9.5 8.8 7.6 6.8 5.6 3.4 1.3 2.7Grant-equivalent financing (in percent of external financing) 8/ ... 92.9 69.6 82.0 83.4 82.4 87.8 78.7 64.7 69.6Memorandum items:Nominal GDP (Billions of US dollars) 7.6 8.1 8.9 9.7 10.6 11.7 12.6 18.3 38.7Nominal dollar GDP growth 4.2 6.8 9.3 9.1 9.7 10.2 7.8 8.8 7.8 7.8 7.8PV of PPG external debt (in Billions of US dollars) 1.1 1.1 1.5 1.7 1.8 1.9 2.0 2.7 4.4(PVt-PVt-1)/GDPt-1 (in percent) 0.8 4.3 1.9 1.3 1.4 0.7 1.7 0.8 0.4 0.8Gross workers' remittances (Billions of US dollars) 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3PV of PPG external debt (in percent of GDP + remittances) 14.5 14.3 17.1 17.5 17.2 16.9 16.3 15.1 11.6PV of PPG external debt (in percent of exports + remittances) 84.4 82.7 101.0 103.7 102.8 102.2 97.9 88.2 62.2Debt service of PPG external debt (in percent of exports + remittances) 3.9 5.1 5.7 5.9 6.8 6.3 5.8 4.9 4.4

Sources: Country authorities; and staff estimates and projections. 01/ Includes both public and private sector external debt.2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Assumes that PV of private sector debt is equivalent to its face value.5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 7/ Defined as grants, concessional loans, and debt relief.8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Actual Projections

Note: the debt stock estimates in 2013 and 2014 differ to the estimates in Table 1 due to different currency conversion methodologies.

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Estimate

2013 Average5/ Standard

Deviation5/

2014 2015 2016 2017 2018 20192014-19 Average 2024 2034

2020-34 Average

Public sector debt 1/ 28.3 29.3 31.8 32.7 33.1 33.4 33.0 32.6 27.6of which: foreign-currency denominated 21.8 22.4 25.5 26.7 26.8 26.8 26.1 24.4 18.2

Change in public sector debt 6.4 0.9 2.5 0.9 0.3 0.3 -0.3 -0.2 -0.6Identified debt-creating flows 1.7 2.7 -0.9 -0.9 -0.7 -0.6 0.1 0.0 0.6

Primary deficit 3.1 0.3 1.7 4.0 1.1 1.0 1.3 1.5 1.6 1.7 1.6 1.8 1.5Revenue and grants 25.6 24.0 1.3 27.1 26.5 26.1 25.6 25.1 24.8 23.6 22.1 23.1

of which: grants 9.3 10.5 1.3 9.8 8.4 7.2 6.2 5.4 4.7 2.5 0.7 2.0Primary (noninterest) expenditure 28.7 31.1 27.6 27.1 26.9 26.6 26.4 25.2 24.0

Automatic debt dynamics -0.2 -1.0 -1.6 -1.7 -1.9 -2.1 -1.5 -1.5 -1.3Contribution from interest rate/growth differential -0.6 -1.1 -1.5 -1.5 -1.7 -1.7 -1.6 -1.5 -1.2

of which: contribution from average real interest rate 0.3 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.4of which: contribution from real GDP growth -1.0 -1.6 -1.8 -1.9 -2.0 -2.0 -1.9 -1.9 -1.6

Contribution from real exchange rate depreciation 0.4 0.2 -0.1 -0.2 -0.3 -0.4 0.1 ... ...Other identified debt-creating flows -1.2 -4.3 -0.3 -0.4 -0.2 -0.1 0.0 0.0 0.0 0.0 0.0

Privatization receipts (negative) -0.1 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Debt relief (HIPC and other) -0.1 -0.1 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0Other (specify, e.g. bank recapitalization) -1.0 -0.1 -0.2 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes 4.7 -1.8 3.4 1.9 1.0 0.9 -0.4 -0.3 -1.2

Other Sustainability IndicatorsPV of public sector debt 21.3 21.5 23.8 23.9 23.9 23.7 23.5 23.5 21.1

of which: foreign-currency denominated 14.8 14.6 17.5 17.9 17.5 17.2 16.6 15.3 11.6of which: external 14.8 14.6 17.5 17.9 17.5 17.2 16.6 15.3 11.6

PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ...Gross financing need 2/ 6.9 9.3 6.1 5.6 6.1 6.1 6.3 6.8 7.0PV of public sector debt-to-revenue and grants ratio (in percent) 83.2 79.3 89.8 91.4 93.3 94.5 94.7 99.6 95.1PV of public sector debt-to-revenue ratio (in percent) 131.0 124.4 131.6 125.9 123.2 120.1 117.1 111.6 98.4

of which: external 3/ 91.0 84.7 96.8 94.2 90.6 86.9 82.7 72.8 54.4Debt service-to-revenue and grants ratio (in percent) 4/ 4.7 6.3 6.6 6.5 8.4 7.1 7.0 8.3 10.0Debt service-to-revenue ratio (in percent) 4/ 7.5 9.8 9.7 9.0 11.1 9.1 8.7 9.3 10.3Primary deficit that stabilizes the debt-to-GDP ratio -3.3 3.1 -1.4 0.0 1.0 1.2 1.9 1.8 2.4

Key macroeconomic and fiscal assumptionsReal GDP growth (in percent) 4.6 7.7 1.9 6.0 6.7 6.2 6.4 6.3 6.0 6.3 6.0 6.0 6.0Average nominal interest rate on forex debt (in percent) 2.8 1.3 0.6 2.6 2.9 2.9 2.6 2.4 2.2 2.6 1.7 1.5 1.8Average real interest rate on domestic debt (in percent) 2.7 -1.8 3.9 3.9 1.9 1.9 2.7 2.7 4.6 3.0 4.4 4.1 4.3Real exchange rate depreciation (in percent, + indicates depreciation) 2.7 -4.9 4.6 0.8 ... ... ... ... ... ... ... ... ...Inflation rate (GDP deflator, in percent) 4.9 9.0 3.3 3.8 5.5 5.7 6.1 6.8 4.7 5.4 4.7 4.7 4.7Growth of real primary spending (deflated by GDP deflator, in percent) 16.8 3.1 5.6 14.6 -5.4 4.4 5.7 5.3 5.1 4.9 5.0 6.1 5.3Grant element of new external borrowing (in percent) ... … … 46.1 20.8 45.9 47.3 50.0 53.6 44.0 48.2 43.9 ...Sources: Country authorities; and staff estimates and projections.1/ [Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 3/ Revenues excluding grants.4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Actual Projections

ministry of finance and economic planning€¦ · web viewpublic debt includes both the external...

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